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pdf2016 MAP Guide Cover Sheet
MULTIFAMILY ACCELERATED
PROCESSING (MAP) Guide
Revised January 29, 2016
Office of the Assistant Secretary for Housing–
FHA Commissioner
Public reporting burden for this collection of information is estimated to average 539.5 hours per response, including the time for reviewing
instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information.
The information is being collected for consideration of the endorsement for insurance by the Secretary or in consideration of the consent of the
Secretary to the transfer of the mortgaged property or the sale and conveyance of the mortgaged property by the Secretary, and in order to comply
with the requirements of the National Housing Act. The information will be used by HUD to ensure that viable projects are developed. This agency
may not collect this information, and you are not required to complete this form, unless it displays a valid OMB control number.
Privacy Act Notice: The United States Department of Housing and Urban Development, Federal Housing Administration, is authorized to solicit the
information requested in the form by virtue of Title 12, United States Code, Section 1701 seq., and regulations promulgated thereunder at Title 12 Code of
Federal Regulation. While no assurance of confidentiality is pledged to respondents, HUD generally discloses this data only in response to a Freedom of
Information Act request.
OMB Number: 2502-0541, Expiration Date: March 31, 2017
OMB Approval No. 2502-0001- HUD-92417; OMB Approval No. 2502-0005 – HUD-92001B; OMB Approval No. 2502-0009 – HUD 11; OMB Approval
No. 2502-0010 – HUD-92457; OMB Approval No. 2502-0011 – HUD-92437; HUD-92441; HUD-92442; HUD-92442A; HUD-2880; OMB Approval No.
2502-0013 – HUD-935.2A; OMB Approval No. 2502-0016 – HUD-92023; OMB Approval No. 2502-0018 – HUD-92464; OMB Approval No. 2502-0028
– HUD-92448; OMB Approval No. 2502-0029 – HUD-2010, HUD-92013, HUD-92013 SUPP, HUD-92264, HUD-92264T, HUD-92264A, HUD-92273,
HUD-92274, HUD-92326, HUD-92329, HUD-92331, HUD-92415, HUD-92447, HUD-92452, HUD-92485, HUD-2880, HUD-92466, HUD-92466R-1, HUD92466 R-2, HUD-92466 R-3; OMB Approval No. 2502-0044 – FHA-2205A, HUD-2328, HUD-92330A; OMB Approval No. 2502-0057 – HUD-3433, HUD
3434, HUD 3435; OMB Approval No. 2502-0097 – HUD-92403; OMB Approval No. 2502-0112 – HUD-92330; OMB Approval No. 2502-0118 – HUD2530; OMB Approval No. 2502-0305 – HUD-9832, HUD-9839B, HUD-9839C; OMB Approval No. 2060-0347 – Portfolio Manager (EPA) Related to
energy usage and consumption characteristics; OMB Approval No. 2502-0468 – FHA-3259; OMB Approval No. 2502-0470 – HUD-2554, HUD-92476A;
OMB Approval No. 2502-0505 – Capital Needs Assessment CNA e Tool; OMB Approval No. 2502-0541 – Chapter 2 of the Guide – MAP Lender Approval,
HUD-4128; Mortgagee Letter 2009-27 - Chapter 9 of the Guide – Environmental Requirements.
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MAP Guide Chapter Index
Chapter Index
2016 MAP GUIDE COVER SHEET ....................................................................................................................... 1
MAP GUIDE CHAPTER INDEX ............................................................................................................................. 2
MAP GUIDE CHAPTER AND SECTION INDEX................................................................................................. 4
CHAPTER 1 INTRODUCTION ......................................................................................................................... 14
CHAPTER 2 LENDER AND UNDERWRITER QUALIFICATIONS ........................................................... 20
CHAPTER 3 PROGRAMS .................................................................................................................................... 51
CHAPTER 4 APPLICATION PROCESSING ................................................................................................... 95
CHAPTER 5 ARCHITECTURAL & CONSTRUCTION ANALYSIS ...........................................................104
CHAPTER 6 FORMERLY COST ....................................................................................................................161
CHAPTER 7 VALUATION ANALYSIS & MARKET STUDY GUIDANCE ...............................................162
CHAPTER 8 MORTGAGE CREDIT................................................................................................................234
CHAPTER 9 ENVIRONMENTAL REVIEW AND REQUIREMENTS .......................................................296
CHAPTER 10 MANAGEMENT ANALYSIS ..................................................................................................341
CHAPTER 11 LENDER UNDERWRITING, HUD REVIEW AND CLOSING MATTERS .....................350
CHAPTER 12 CONSTRUCTION PERIOD ....................................................................................................367
CHAPTER 13 COST CERTIFICATION .........................................................................................................411
CHAPTER 14 LOW INCOME HOUSING TAX CREDIT (LIHTC) AND OTHER TAX CREDIT
PROGRAM GUIDANCE ......................................................................................................................................457
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CHAPTER 15 QUALITY ASSURANCE ENFORCEMENT ACTIONS .......................................................480
CHAPTER 16 MASTER LEASE STRUCTURING TO FACILITATE THE USE OF HISTORIC OR NEW
MARKET TAX CREDITS ...................................................................................................................................500
CHAPTER 17 REFINANCING COOPERATIVE HOUSING PROJECTS UNDER SECTION 207
PURSUANT TO SECTION 223(F) ...................................................................................................................506
CHAPTER 18 SECTION 223(A)(7) .............................................................................................................520
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2016 MAP GUIDE COVER SHEET ....................................................................................................................... 1
MAP GUIDE CHAPTER INDEX ............................................................................................................................. 2
Chapter Index ......................................................................................................................................................................... 2
MAP GUIDE CHAPTER AND SECTION INDEX................................................................................................. 4
Section Index .......................................................................................................................................................................... 4
CHAPTER 1 INTRODUCTION ......................................................................................................................... 14
1.1
MAP and the Guide ..................................................................................................................................................... 14
1.2
Purposes of MAP ........................................................................................................................................................ 15
1.3
Brief Summary of MAP ............................................................................................................................................... 16
1.4
Relation of MAP to Handbooks, Notices and Regulations ........................................................................................... 17
1.5
Workload Management .............................................................................................................................................. 18
CHAPTER 2 LENDER AND UNDERWRITER QUALIFICATIONS ........................................................... 20
2.1
Introduction ................................................................................................................................................................ 20
2.2
Lender Qualifications .................................................................................................................................................. 21
2.3
Standards Required for Qualification .......................................................................................................................... 22
2.4
Loan Consultants/Loan Brokerage .............................................................................................................................. 23
2.5
MAP Lender Underwriting and Construction Loan Administration Requirements....................................................... 24
2.6
Electronic Capability and Internet Access.................................................................................................................... 26
2.7
Identity of Interest ...................................................................................................................................................... 27
2.8
MAP Lender Application Package................................................................................................................................ 37
2.9
Limitation on Requirements ....................................................................................................................................... 39
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2.10
Monitoring by Multifamily Asset Counterparty Oversight Division ........................................................................ 40
2.11
MAP Underwriter Approval Standards ................................................................................................................... 41
2.12
MAP Lender Underwriter Trainee Approval Requirements ..................................................................................... 46
2.13
MAP Underwriter Transfers ................................................................................................................................... 49
CHAPTER 3 PROGRAMS .................................................................................................................................. 51
3.1
General Program Requirements .................................................................................................................................. 51
3.2
New Construction/Substantial Rehabilitation Program Requirements ................................................................... 67
3.3 Section 221(d)(4) Mortgage Insurance for Rental and Cooperative Housing - New Construction and Substantial
Rehabilitation ....................................................................................................................................................................... 72
3.4 Section 220 Mortgage Insurance for Rental Housing for Urban Renewal and Concentrated Development Areas – New
Construction and Substantial Rehabilitation ......................................................................................................................... 74
3.5 Section 231 Mortgage Insurance for Rental Housing for Elderly Persons – New Construction and Substantial
Rehabilitation ....................................................................................................................................................................... 75
3.6
Section 241(a) Mortgage Insurance for Supplemental Loans for Multifamily Projects ................................................ 76
3.7
Section 207/223(f) Mortgage Insurance for Purchase or Refinancing of Existing Multifamily Rental Housing ............. 79
3.8
Section 223(a)(7) Refinancing of Existing Insured Mortgages ...................................................................................... 86
3.9
Property Insurance Requirements .............................................................................................................................. 88
3.10
Large Loan Risk Mitigation Policies ........................................................................................................................ 91
CHAPTER 4 APPLICATION PROCESSING ................................................................................................... 95
4.1
Introduction / General ................................................................................................................................................ 95
4.2
Stages of Application .............................................................................................................................................. 95
4.3
Lender Processing ....................................................................................................................................................... 98
4.4
HUD Processing ......................................................................................................................................................... 100
CHAPTER 5 ARCHITECTURAL & CONSTRUCTION ANALYSIS ...........................................................104
5.1
Classification of Work and Eligible Construction Activities ........................................................................................ 104
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5.2
Qualifications, Responsibilities, and Approval of Due Diligence Consultants ............................................................ 107
5.3
Required Design Services and Documentation by Construction Activity and Program. ............................................. 112
5.4
Architectural Standards and Other Criteria ............................................................................................................... 119
5.5
Construction Contracts ............................................................................................................................................. 119
5.6
Streamlined Processing Instructions For Projects Requiring Professional Design Services ........................................ 120
5.7
New Construction, Standard Processing- Concept Meeting through Firm Commitment Application ......................... 124
5.8
Firm Commitment through Initial Endorsement – New Construction........................................................................ 130
5.9
Substantial Rehabilitation, Standard Processing- Concept Meeting through Initial Endorsement ............................. 135
5.10
Processing for Refinance or Acquisition, Section 223(f) and 223(a)(7) and 241(a) for Repairs and Alterations ..... 140
5.11
Cost Estimating for Lenders .................................................................................................................................. 145
5.12
Cost Package for Firm Commitment ..................................................................................................................... 152
5.13
HUD Procedures ................................................................................................................................................... 158
CHAPTER 6 FORMERLY COST ....................................................................................................................161
CHAPTER 7 VALUATION ANALYSIS & MARKET STUDY GUIDANCE ...............................................162
7.1
Introduction .............................................................................................................................................................. 162
7.2
Selection of Appraisers and Market Analysts ............................................................................................................ 163
7.3
Third Party Appraiser and Market Analyst Qualifications ......................................................................................... 164
7.4
HUD Workload Sharing Reviews of Appraisal and Market Study Reports .................................................................. 166
7.5
Content and Format of the Market Study ................................................................................................................. 167
7.6
Appraisal Requirements............................................................................................................................................ 177
7.7
Estimating Project Income ........................................................................................................................................ 185
7.8
Operating Expense Estimates and Underwritten Net Operating Income (NOI) ......................................................... 193
7.9
Site Analysis .............................................................................................................................................................. 201
7.10
Pre-Application Stage for Sections 220, 221(d) and 231 ....................................................................................... 204
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7.11
Firm Commitment Processing for Sections 220, 221(d) and 231 (New Construction) ............................................ 206
7.12
Firm Commitment Processing for Section 223(f)................................................................................................... 207
7.13
Substantial Rehabilitation Processing for Sections 220,221(d)(4) and 231 ............................................................ 209
7.14
Calculating Operating Deficits .............................................................................................................................. 213
7.15
Leaseholds/Ground Leases ................................................................................................................................... 216
7.16
Tax Abatement Procedures ................................................................................................................................. 223
7.17
Project Based Section 8 and LIHTC Processing ...................................................................................................... 226
7.18
Appraisal Review Policy and Requirements .......................................................................................................... 230
CHAPTER 8 MORTGAGE CREDIT................................................................................................................234
8.1
Introduction .............................................................................................................................................................. 234
8.2
Borrower Types – Single Asset Borrower Entity ......................................................................................................... 234
8.3
Reviewing Principals and Other Parties in Control .................................................................................................... 235
8.4
Investigating Credit and Character ............................................................................................................................ 242
8.5
Evaluating Financial Capacity: Analysis of Financial Statements ............................................................................... 246
8.6 Prior Approval of Principals/Borrowers with FHA-Insured Balances Greater than $250 Million or 25 or More
Commercial Real Estate Assets ........................................................................................................................................... 255
8.7
Secondary Financing ................................................................................................................................................. 257
8.8
Required Application-Processing Exhibits and Lender and HUD Responsibilities ...................................................... 263
8.9
Term of Mortgage and Commencement of Amortization.......................................................................................... 273
8.10
Sections 220, 221(d), 231, 241(a) Firm Commitment Processing: Determining Mortgage Amounts, Cash
Requirements and Related Items ........................................................................................................................................ 275
8.11
Sections 223(a)(7) and 223(f) Firm Commitment Processing: Determining Mortgage Amounts, Cash Requirements
and Related Matters ........................................................................................................................................................... 277
8.12
Firm Commitment Processing with Grants and Loans........................................................................................... 282
8.13
Insurance Upon Completion ................................................................................................................................. 285
8.14
Determining the Estimated Cash Requirements for Completing the Project ......................................................... 286
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Bond Financed Projects ......................................................................................................................................... 291
CHAPTER 9 ENVIRONMENTAL REVIEW AND REQUIREMENTS .......................................................296
9.1
Introduction .............................................................................................................................................................. 296
9.2
Procedures ................................................................................................................................................................ 298
9.3
Contamination Analysis ............................................................................................................................................ 303
9.4
HUD Staff Responsibilities in Reviewing Cases Requiring Remediation ..................................................................... 316
9.5
Environmental Report............................................................................................................................................... 318
CHAPTER 10 MANAGEMENT ANALYSIS ..................................................................................................341
10.1
Introduction ......................................................................................................................................................... 341
10.2
Exhibits Required for Firm Commitment .............................................................................................................. 341
10.3
Lender Review of Management Documents ......................................................................................................... 343
10.4
HUD Asset Management Review .......................................................................................................................... 345
10.5
Review of Previous Participation .......................................................................................................................... 345
10.6
Bonding Requirements for Agents ........................................................................................................................ 346
10.7
Management Agreement Requirements .............................................................................................................. 346
10.8
Approval of Proposed Management Agent .......................................................................................................... 348
10.9
Affirmative Fair Housing Marketing ..................................................................................................................... 349
10.10
Management Agent Responsibility for Escrow Administration.............................................................................. 349
CHAPTER 11 LENDER UNDERWRITING, HUD REVIEW AND CLOSING MATTERS .....................350
11.1
General ................................................................................................................................................................ 350
11.2
Lender Underwriting ............................................................................................................................................ 351
11.3
HUD Regional Center or Satellite Office Underwriting Review ............................................................................. 355
11.4
Program Closing Provisions .................................................................................................................................. 360
11.5
Loan Fees ............................................................................................................................................................. 360
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11.6
Title Matters ........................................................................................................................................................ 362
11.7
Borrower Entity’s Organizational Documents ....................................................................................................... 363
11.8
Note ..................................................................................................................................................................... 363
CHAPTER 12 CONSTRUCTION PERIOD ....................................................................................................367
12.1
Start of Construction – Sections 221(d)(4), 220 and 241(a) ................................................................................... 367
12.2
Pre-Construction Conference ............................................................................................................................... 367
12.3
HUD Construction Monitoring .............................................................................................................................. 369
12.4
Architect’s Duties in Administering Construction Contract ................................................................................... 377
12.5
Architect’s Adequacy ............................................................................................................................................ 378
12.6
Completion Inspections ........................................................................................................................................ 379
12.7
Insurance of Advances and Related Matters ........................................................................................................ 382
12.8
Construction Change Orders – General HUD Duties.............................................................................................. 386
12.9
Change Orders – Inspection Instructions .............................................................................................................. 390
12.10
Change Orders – HUD Architectural and Cost Instructions ................................................................................ 392
12.11
Change Orders – HUD Appraisal and Mortgage Credit Instructions ...................................................................... 392
12.12
Labor and Fair Housing and Equal Opportunity (FHEO) ........................................................................................ 395
12.13
Surveys ............................................................................................................................................................. 396
12.14
Permission to Occupy ........................................................................................................................................... 396
12.15
Escrowed Funds, Letters of Credit, Deposits, Holdbacks and Related Matters ................................................. 397
12.16
Insurance Upon Completion ................................................................................................................................ 403
12.17
Completion of Repairs Pursuant to Section 223(f) ................................................................................................ 406
CHAPTER 13 COST CERTIFICATION .........................................................................................................411
13.1
Projects that Must Certify .................................................................................................................................... 411
13.2
Purpose of Certification ........................................................................................................................................ 411
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13.3
Certifiable Costs ................................................................................................................................................... 411
13.4
Projects with LIHTCs are Exempt from Cost Certification Requirements ............................................................... 411
13.5
Types of Cost Certification .................................................................................................................................... 416
13.6
Entities That Must Cost Certify ............................................................................................................................. 416
13.7
Cost Certification Sequence of Events .................................................................................................................. 417
13.8
Substantial Completion Date, Cut-Off Date, and Final Completion Date .............................................................. 418
13.9
Administrative Completion Date .......................................................................................................................... 418
13.10
Submission Date ................................................................................................................................................... 419
13.11
Required Forms ..................................................................................................................................................... 419
13.12
Required Statements and Certifications........................................................................................................... 420
13.13
Deficiencies in Cost Certification Submission .................................................................................................... 427
13.14
Mortgage Credit Limited Review ...................................................................................................................... 428
13.15
Mortgage Credit Detailed Review ......................................................................................................................... 429
13.16
Allowable Costs in Borrower’s Certificate of Actual Cost ...................................................................................... 430
13.17
Cost Review of Contractor’s Cost Certification ..................................................................................................... 442
13.18
Determination of the Non-profit Borrower’s Initial Equity Investment ................................................................. 446
13.19
Determine the Borrower’s Initial Investment ....................................................................................................... 447
13.20
Section 223(f) Modified Form of Cost Certification ............................................................................................... 447
13.21
Special Instructions for Substantial Rehabilitation ........................................................................................... 448
13.22
Mortgage Reduction after Cost Certification ........................................................................................................ 448
13.23
Increase in Mortgage Amount ......................................................................................................................... 451
13.24
Restrictions on Mortgage Increases...................................................................................................................... 452
13.25
Processing a Mortgage Increase ........................................................................................................................... 452
13.26
Authorization to Reopen Mortgage Transaction................................................................................................... 454
13.27
Deferment of Principal Payments ......................................................................................................................... 455
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13.28
Document Distribution ......................................................................................................................................... 455
13.29
Office of Inspector General ............................................................................................................................... 456
13.30
Cost Certification Incontestability ..................................................................................................................... 456
13.31
Post Closing Escrows ......................................................................................................................................... 456
CHAPTER 14 LOW INCOME HOUSING TAX CREDIT (LIHTC) AND OTHER TAX CREDIT
PROGRAM GUIDANCE ......................................................................................................................................457
14.1
Introduction ......................................................................................................................................................... 457
14.2
Affordable Housing Underwriting and Program Guidance In Other Parts of the MAP Guide ................................. 457
14.3
Historic and New Markets Tax Credits .................................................................................................................. 459
14.4
Subsidy Layering Review ...................................................................................................................................... 459
14.5
Evidence of Tax Credit or Private Activity Bond Cap Allocations ........................................................................... 460
14.6
Single Underwriter and Technical Reviews ........................................................................................................... 460
14.7
Treatment of HAP Contract Renewals for Section 8 Assisted Tax Credit Projects .................................................. 461
14.8
Application/Submission Requirements ................................................................................................................ 464
14.9
Architecture and Engineering ............................................................................................................................... 464
14.10
Mortgage Credit Review for Tax Credit Projects ............................................................................................... 465
14.11
Identities of Interest in Tax Credit Transactions ................................................................................................ 466
14.12
Calculation of Mortgage Amounts for Tax Credit Projects ................................................................................ 467
14.13
Developer Fees and GC Profit ........................................................................................................................... 467
14.14
Structuring of Secondary Debt in Tax Credit Transactions ................................................................................ 469
14.15
Tax Credit Equity Pay-In Schedule ........................................................................................................................ 470
14.16
Equity Bridge Loans (“EBLs”) in Tax Credit Projects........................................................................................... 473
14.17
Syndicator and Investor Fees Paid from Operations ......................................................................................... 474
14.18
Vacancy Rates................................................................................................................................................... 476
14.19
Other Matters ...................................................................................................................................................... 476
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FHA Tax Credit Pilot Program Expansion .............................................................................................................. 479
CHAPTER 15 QUALITY ASSURANCE ENFORCEMENT ACTIONS .......................................................480
15.1
Oversight of Map Lenders .................................................................................................................................... 480
15.2
Authority to Issue MAP Sanctions ........................................................................................................................ 480
15.3
Basis for issuing a Warning Letter or Sanctioning a MAP Lender .......................................................................... 482
15.4
Administrative Record .......................................................................................................................................... 484
15.5
Warning Letters .................................................................................................................................................... 485
15.6
MAP Probation ..................................................................................................................................................... 485
15.7
MAP Suspension................................................................................................................................................... 487
15.8
MAP Termination ................................................................................................................................................. 488
15.9
Settlement Agreements ....................................................................................................................................... 489
15.10
MAP Lender Review Board ............................................................................................................................... 490
15.11
Support Staff for MAP Lender Review Board .................................................................................................... 492
15.12
Procedures for Sanctions .................................................................................................................................. 493
15.13
Notice of Violation ............................................................................................................................................ 494
15.14
Notice of Action ................................................................................................................................................ 496
15.15
Appeals............................................................................................................................................................. 496
15.16
Limited Denial of Participation ......................................................................................................................... 498
15.17
Referral to the Mortgagee Board or the Inspector General............................................................................... 499
15.18
Other Enforcement Actions .............................................................................................................................. 499
CHAPTER 16 MASTER LEASE STRUCTURING TO FACILITATE THE USE OF HISTORIC OR NEW
MARKET TAX CREDITS ...................................................................................................................................500
16.1
Introduction ......................................................................................................................................................... 500
16.2
Background .......................................................................................................................................................... 500
16.3
General - Programmatic Requirements ................................................................................................................ 501
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16.4
Processing Requirements ..................................................................................................................................... 503
16.5
Cost Certification and Final Endorsement ............................................................................................................. 504
CHAPTER 17 REFINANCING COOPERATIVE HOUSING PROJECTS UNDER SECTION 207
PURSUANT TO SECTION 223(F) ...................................................................................................................506
17.1
Introduction ......................................................................................................................................................... 506
17.2
Background .......................................................................................................................................................... 506
17.3
Program Requirements ........................................................................................................................................ 506
17.4
Program Requirements – Technical Processing .................................................................................................... 513
17.5
Program Requirements – Issuance of Firm Commitment and Loan Closing ........................................................... 519
CHAPTER 18 SECTION 223(A)(7) .............................................................................................................520
18.1
Purpose of Section 223(a)(7) ................................................................................................................................ 520
18.2
Consolidation of applicable guidance ................................................................................................................... 520
18.3
Basic Program Requirements ............................................................................................................................... 521
18.4
Processing ............................................................................................................................................................ 529
18.5
Application Requirements Checklist ..................................................................................................................... 534
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1.1
Chapter 1
Introduction
MAP and the Guide
Document page 14
Chapter 1
Introduction
1.1
MAP and the Guide
Multifamily Accelerated Processing (MAP) is designed to establish national standards for approved
lenders to prepare, process and submit loan applications for Federal Housing Administration (FHA)
multifamily mortgage insurance. The MAP Guide provides - in one volume with appendices – guidance
for HUD staff, lenders, third party consultants, borrowers, and other industry partners. Topics include
mortgage insurance program descriptions, borrower and lender eligibility requirements, application
requirements, underwriting standards for all technical disciplines and construction loan administration
requirements. The MAP Guide only applies to FHA multifamily mortgage insurance programs. Except to
the extent lender monitoring or enforcement activities overlap, Section 232 and other programs
administered by the Office of Healthcare Programs are not addressed by the MAP Guide.
The Guide has been updated to reflect various organizational, policy and processing changes implemented
since the last edition was published in 2011. Examples include electronic submission of data in a
standardized format, the consolidation of HUD Field Offices, workload sharing, and a “risk-based”
underwriting approach. The Multifamily Transformation is consolidating the Multifamily Hubs and
Program Centers into Regional Centers and Satellite Offices. The terms Regional Center and Satellite
Office are meant to include Multifamily Hubs and Program Centers for those parts of the country that
have not yet been consolidated.
Statutory authority for the implementation of MAP is contained in the basic insuring authority for each of
the programs covered in MAP, pursuant to the National Housing Act, Sections 220, 221(d)(4), 231,
241(a), 223(a)(7), and 223(f). Additionally, Section 211 of the National Housing Act and Section 7(d) of
the Department of HUD Act authorizes the Secretary to make such rules and regulations as may be
necessary to carry out the provisions of the Act. The FHA requirements listed in HUD regulations
covering each MAP eligible program are included in and more fully explained in this MAP Guide.
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Chapter 1
Introduction
Purposes of MAP
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Chapter Index / Section Index
Purposes of MAP
The MAP program is intended to provide a consistent, expedited mortgage insurance application process at
each HUD Multifamily Regional Center or Satellite Office. HUD no longer accepts new applications for
the covered programs, either for Pre-application review or for Firm Commitment review, under local
“fast-track” processing. All MAP eligible projects must be submitted using MAP processing unless a
waiver is granted to process under Traditional Application Processing (TAP). Such waiver authority is
retained by HUD Headquarters’ Director of Multifamily Production.
Applications for TAP processing require more work and responsibility by HUD staff, and accordingly a
higher application fee may be charged. Projects not eligible for MAP, and which may be submitted under
TAP are:
•
Applications submitted by FHA approved multifamily lenders who are not approved to submit
MAP applications,
•
Applications where there is an identity of interest between the lender and the borrower or
affiliates of either, or
•
Applications for mortgage insurance under Programs or Sections of the Act not covered by
MAP (e.g. Cooperatives under Section 213).
Some MAP approved Lenders (MAP Lenders) only originate loans and do not close or service them. After
obtaining a Firm Commitment for mortgage insurance under MAP, the originating lender may sell or transfer
the Firm Commitment to another MAP Lender, so long as the MAP Lender closing the loan does not have an
identity of interest with the borrower for this project. The second MAP Lender will close the loan, oversee the
construction loan administration, if applicable, and service the loan in accordance with HUD requirements. At
the Pre-application submission, the originating lender should inform the Regional Center or Satellite Office if
it does not intend to service the loan or administer the construction loan. The originating lender must identify
which lender will be responsible for those functions as soon as the closing / servicing lender is identified. The
second lender must identify their construction loan administrator before or at initial endorsement. A loan
servicer who receives a transferred MAP loan for servicing must be FHA approved for multifamily
housing and have an approved Construction Loan Administrator, unless the loan is a refinancing with no
repair escrow. The servicing lender generally is, but is not required to be, a MAP approved Lender.
MAP is intended to:
A. Increase HUD’s reliance upon the lender’s due diligence, and increase the MAP Lender’s
accountability for its due diligence and underwriting.
B. Establish a process that significantly reduces the amount of HUD review time.
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C. Strike a careful balance between expedited processing and ensuring an acceptable level of risk
management for HUD’s multifamily mortgage insurance programs.
D. Have in one volume, the MAP Guide, the basic information required for loan origination by the
lender and for review by HUD staff.
E. Bring Handbook and Notice instructions current and maintain up-to-date instructions through
amendments to the MAP Guide.
F. Provide the lender with predictable and consistent underwriting guidelines, thus facilitating
efficient processing and better service for borrowers.
1.3
Brief Summary of MAP
A. Lender Qualifications and Monitoring.
By permitting a MAP lender to prepare much of the documentation for an application for mortgage
insurance, HUD places confidence in the lender’s integrity and competence. A lender wishing to
submit a MAP application must be:
1. An FHA approved lender. See the Mortgagee Approval Handbook (4060.1).
2. Approved by the Multifamily Asset Counterparty Oversight Division (MACOD, formerly
Lender Qualification and Monitoring Division or LQMD) at HUD Headquarters. See Chapter
2 of the MAP Guide.
3. Subject to Quality Assurance Enforcement Actions. See Chapter 15 of the MAP Guide.
B. Programs Covered by MAP.
MAP may be used for the following programs, identified by section of the National Housing Act:
•
220 - new construction or substantial rehabilitation of mixed use projects in urban renewal
areas;
•
221(d)(4) - new construction or substantial rehabilitation of apartments,
•
223(a)(7) - refinancing of FHA insured mortgages;
•
223(f) - refinancing or purchase of existing apartments;
•
231 - new construction or substantial rehabilitation of housing for the elderly; and
•
241(a) - Supplemental Loan program for rehabilitation or additions to projects which have
an FHA insured first mortgage.
C. Application processing instructions are described in Chapter 4. Standard Processing Times are
detailed in Appendix 1 to this Guide. All periods longer than two weeks are described in calendar
days, and periods of two weeks or less, in business days.
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HUD has certain responsibilities which it does not assign to the lender, including responsibility for the
environmental clearance on Form HUD-4128 (even though the lender prepares information for HUD’s
review), approval of the borrower’s Affirmative Fair Housing Marketing program, and issuing the
commitment for mortgage insurance.
D. Construction Responsibilities.
1. Under MAP, HUD must approve the initial and final draws.
2. HUD will contract, or perform or otherwise provide, for inspection duties and will provide
copies of the Trip Report to the MAP lender. Generally, HUD will rely on one inspection per
month, however the Multifamily Regional Director has discretion to require additional
inspections based on fact specific circumstances.
3. The MAP lender will prepare and approve the interim draws during construction.
4. HUD must approve the construction amount for each item in the initial and final advance, and
for each Change Order during construction.
E. Servicing.
MAP makes no changes in procedures for servicing or asset management, except for servicing
lenders with prior approval for delegated responsibility for repair escrow administration. See
Section 1.2 above for guidance on MAP approved lenders who only originate and transfer loans to
another FHA approved lender for servicing.
1.4
Relation of MAP to Handbooks, Notices and Regulations
A. All applicable HUD Handbooks, Notices and Forms remain in effect and will be used for
traditional HUD processing of mortgage loan applications. For applications under MAP, the
Guide incorporates the majority of Handbook, Notice and Mortgagee Letter requirements and
includes in the Appendix the forms that are required for most applications. If there is a conflict
between the Guide and the Handbooks or instructions for various HUD forms, the Guide will take
precedence. Lenders with questions should address them to the Regional Center or Satellite Office
processing the application. Where the Guide is silent on a matter, the lender should consult the
following MAP website: http://www.hud.gov/offices/hsg/mfh/map/maphome.cfm, or the
Regional Center or Satellite Office processing a particular application.
B. Consistent with their level of approval, the lender must be familiar with the basic programmatic
requirements and regulations of the insurance programs set forth in 24 Code of Federal Regulations,
including but not limited to Part 200.
C. The lender is encouraged to contact a Regional Center or Satellite Office if any issues are not
addressed in the Guide or if any clarifications are needed. See Chapter 11 on Underwriting for
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waiver procedures. The Multifamily Regional Director may waive non-regulatory or non-statutory
provisions of the Guide, although Chapter 11 specifies a number of requirements that may not be
waived without prior approval of HUD Headquarters (HQ). Regulatory provisions may be waived
only on approval of the Assistant Secretary for Housing - FHA Commissioner. Statutory
provisions may not be waived.
D. The lender is also encouraged to communicate early with the borrower to ensure that the borrower,
the proposed management agent, and/or the Project have not been referred to HUD’s Departmental
Enforcement Center (DEC), as such referrals may require additional time to resolve and create
impediments to a timely closing.
E. Any waiver of this Guide granted by the Multifamily Regional Director must be documented in the
Regional Center or Satellite Office docket, along with the lender’s request and supporting
documentation for the approval. The Form HUD-2 must be submitted electronically to the HUD
HQ Office of Multifamily Housing Production’s SharePoint site in accordance with outstanding
instructions. No hard copies need to be submitted to HQ; Multifamily Field Office staff and OGC
may rely on electronic signatures or scanned copies. HQ will periodically review waivers to
determine if changes to the Guide or to the regulations are appropriate.
F. Program Obligations. HUD made technical and substantive changes when it adopted new and
updated FHA multifamily loan closing documents. The term “directives” was eliminated and
substituted with the term “Program Obligations.” “Program Obligations” refer to:
1. All applicable statutes and any regulations issued by the Secretary that apply to the Project,
including all amendments to such statutes and regulations, as they become effective, except
that changes subject to notice and comment rulemaking shall become effective only upon
completion of the rulemaking process, and
2. All current requirements in HUD handbooks and guides, notices, and mortgagee letters that
apply to the Project, and all future updates, changes and amendments thereto, as they become
effective, except that changes subject to notice and comment rulemaking shall become
effective only upon completion of the rulemaking process, and provided that such future
updates, changes and amendments shall be applicable to the Project only to the extent that they
interpret, clarify and implement terms in the applicable closing document rather than add or
delete provisions from such document. Handbooks, guides, notices, and mortgagee letters are
available on HUD's official website:
(http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/)
1.5
Workload Management
A. Applications for mortgage insurance should be submitted to the Regional Center or Satellite Office
having jurisdiction for the area where the property is located (the “originating” office). The
Regional Center or Satellite Office Director is responsible for workload management within their
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Regional Center or Satellite Office, including:
1. Delegation and staff assignments,
2. Participation in Workload Sharing,
3. Establishing priority of application processing,
4. Meeting standard processing times, and
5. Loan Committee.
B. Workload Sharing. Depending on staff capacity and programmatic expertise, a Regional Center
Director may transfer processing assignments to other Multifamily Regional Centers or Satellite
Offices (“processing” offices) through Workload Sharing. Workload sharing occurs outside if the
geographic service area identified in existing published delegations of authority. The originating
Multifamily Regional Director will retain Commitment Authority and closing responsibility. The
processing office will provide assistance as requested, following protocols of the originating office
and counsel. A Regional Center Director may re-delegate processing responsibilities to designated
Multifamily staff in processing offices unless specifically restricted by the Guide, statute or
regulation or by existing published delegations of authority.
C. Washington Docket. At the “initial”/“final” endorsement and closing, the Regional Center’s
Closing Coordinator or other appropriate designated staff should assemble a set of original
documents (or as HUD allows, copies) for the Washington Docket, in accordance with the
requirements and procedures set forth in the MAP Guide Appendix 11E. If originals of recorded
documents are unavailable because of filing or recording procedures, a completely legible copy
should be collected (certified true and correct by the recorder or by the title company). Note that
the Phase I Environmental Site Assessment is a program requirement and a supporting document
for form HUD-4128, Environmental Assessment and Compliance Findings for the Related Laws.
It should remain with the HUD-4128 in the Washington Docket as a part of the permanent,
historical file.
D. Initial Endorsement Diligence Review. The Regional Center Director and program staff will
review the lender’s request for initial endorsement and closing, and supporting materials in
accordance with Program Obligations. In this review, the Multifamily Regional Director and
program staff should confirm the information listed on the Initial Endorsement Diligence Review
Worksheets, attached in the MAP Guide Appendices 11A – 11D, and may use such worksheets to
document compliance with Program Obligations. Applications participating in Workload Sharing
will follow closing requirements and protocols of the originating office and counsel; the
processing office will provide such support as requested.
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Chapter 2
Lender and Underwriter Qualifications
2.1
Introduction
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Chapter 2
Lender and Underwriter
Qualifications
2.1
Introduction
A. MAP requires lenders and underwriters to be skilled in underwriting multifamily housing loans
and in preparing applications for FHA multifamily mortgage insurance. MAP Lenders and their
Underwriters must be approved by the Multifamily Asset Oversight Division (“MACOD”).
B. Approval of a MAP Lender or underwriter by the Multifamily Asset Counterparty Oversight
Division is on a nationwide basis, so that the MAP Lender and their Underwriter may process
MAP loans regardless of which Regional or Satellite Office will be processing the loan. By
accepting the opportunity to use MAP, a MAP Lender and Underwriter agrees that its MAP loans
will be subject to post-endorsement review by the Multifamily Asset Counterparty Oversight
Division and that if it fails to meet HUD standards for underwriting loans, its MAP designation
may be terminated. MAP approval does not expire but may be terminated in accordance with the
Quality Assurance Enforcement Actions in Chapter 15.
C. Approval by the Multifamily Asset Counterparty Oversight Division as a MAP Lender is a
prerequisite to participation in the MAP program, but MAP approval does not obviate the need to
have an experienced team on each application. If the HUD office has concerns regarding the MAP
Lender’s or its Underwriter’s performance or capabilities, the office should consult with the
Multifamily Asset Counterparty Oversight Division for additional monitoring or potential
enforcement action.
The MAP Lender is responsible for insuring that all third party contractors meet the requirements
outlined in the MAP Guide, including the USPAP Competency provision and jurisdictional
certification requirements. If the HUD office has concerns regarding the third party contractor’s
past performance or capabilities, the office should consult with the Multifamily Asset
Counterparty Oversight Division for potential enforcement action.
D. The originating MAP Lender may sell or transfer a MAP application only upon receipt of a Firm
Commitment. The application may only be sold to another MAP approved lender not currently
subject to any suspension or Limited Denial of Participation penalties, and within the limitations
on MAP Lenders with identities of interest with the Borrowers (or affiliates of both). See Section
1.2 for additional details.
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Lender Qualifications
A. Lender MAP approval requests should be sent to:
Multifamily Asset Counterparty Oversight Division
Office of Multifamily Development
451 7th Street, SW, Room 6151
Washington, DC 20410
FAX Number: 202-401-9087
B. The lender prepares the application for approval as a MAP Lender. There is no specific required
form for this application. Upon receipt of all the information specified in Section 2.8, the
Multifamily Asset Counterparty Oversight Division will process the application within 30 days.
C. The Director of the Multifamily Asset Counterparty Oversight Division must approve each MAP
Lender in writing. The names of approved MAP Lenders will be posted on the HUD website at:
http://www.hud.gov/utilities/intercept.cfm?/offices/hsg/mfh/map/aprvlend.pdf,
And for the HUD staff at:
http://hudatwork.hud.gov/po/h/hm/fog/dev/authsign.pdf.
D. The Multifamily Asset Counterparty Oversight Division may disapprove an application on the
grounds that: a) it fails to meet the standards set forth in Section 2.3, b) it fails to provide
sufficient information required by Section 2.8 or, c) there are specified deficiencies that must be
corrected. An appeal of the Multifamily Asset Counterparty Oversight Division’s decision to
disapprove an application, or specific conditions of approval, may be made to the Deputy Assistant
Secretary for Multifamily Housing.
E. If the MAP Lender’s approval has been terminated, the Lender may not reapply for 12 months
after termination. (See Chapter 15, Section 15.8.E) The lender may appeal its termination as
provided in Chapter 15, Section 15.15.
F. The applicant should submit one complete hard copy and an electronic version of the application.
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Standards Required for Qualification
A MAP Lender must demonstrate that it is an FHA approved multifamily mortgagee pursuant to 24 CFR
Part 202, that it is financially sound, that it has on staff principal employees with the necessary
multifamily underwriting experience required by this Guide, and that its record with FHA-insured or
conventional multifamily loans has been satisfactory. An FHA Lender will not be granted MAP approval
if the lender uses contract underwriters. The requirements are discussed in this Section below:
A. A Lender must be an FHA-approved multifamily mortgagee as a result of submitting Form HUD92001-B, Branch Office Notification Title I/ Title II to the Office of Lender Activities.
B. The Lender must not be subject to judgments, administrative claims, or lawsuits, which would
seriously affect its ability to do business and must not unlawfully discriminate.
C. Multifamily underwriting experience on staff is a key to MAP approval. The Lender must identify
staff persons with the level of training and experience required pursuant to Section 2.11 below.
The Underwriter must have worked regularly in the multifamily lending business and have
underwritten the required number of transactions pursuant to Section 2.11 below, which have been
funded. HUD will verify that the Underwriter has attended a MAP training session conducted by
HUD before submitting an application or pre-application submission. HUD will defer this
requirement for otherwise qualified underwriters until such training is offered. MAP training will
be held periodically by HUD. Training announcements will be posted on the MAP home page
website under MAP Underwriting training at:
(http://www.hud.gov/offices/hsg/mfh/map/maptraining.cfm)
D. The lender’s application must identify experienced staff who have the authority to underwrite loan
applications and sign the narrative summary in a loan application. The applicant must also identify
whose signatures may bind the Lender for its responsibilities under MAP.
E. FHA multifamily experience is not specifically required for initial approval as a MAP Lender, but
if the Lender lacks FHA experience, additional emphasis will be placed on consistent and recent
analogous conventional multifamily lending experience. For any loan processed under MAP, the
lender must thoroughly understand FHA requirements for its mortgage insurance programs.
F. A lender may be rejected for MAP qualification for a recent history of early defaults, foreclosures,
or assignments of FHA-insured loans. The reason for any assignments, early defaults or
foreclosures will be subject to the evaluation of the Multifamily Asset Counterparty Oversight
Division. There may be a variety of reasons for assignments, such as unpredictable economic
changes in the area, inadequate servicing or poor quality underwriting. Multifamily Asset
Counterparty Oversight Division will review any loan which the applicant has underwritten and
endorsed within the previous five years and which has defaulted and been assigned to HUD. The
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purpose of the review will be to determine whether the Lender was at fault in its origination of a
loan that did not perform satisfactorily, or if there was a pattern of poor performance.
G. If the Lender has worked with HUD’s Regional and Satellite Offices (or Hubs and Program
Centers) in the previous two years, the Multifamily Asset Counterparty Oversight Division will
contact those offices to ascertain their experience with the applicant and the responses will be
included in the Lender’s file. A pattern of unsatisfactory applications at one or more Hubs or
Program Centers may be grounds for rejection of the Lender.
2.4
Loan Consultants/Loan Brokerage
It is common practice for Lenders to use consultants, individuals and companies, to increase origination and
underwriting capacity. The term consultant, as used here, applies to a mortgage broker, loan correspondent
and packager who is not a MAP approved Lender. A consultant may have the following roles in FHA
multifamily programs:
A. Under TAP, the consultant may refer new business to a Lender including information supplied by a
proposed borrower/sponsor.
1. The consultant may provide a wide range of additional services to the Lender. HUD offices may
accept application packages, correspond with and rely on information submitted by the consultant
on behalf of the Lender.
2. The consultant’s fee is paid solely from either:
(a) the mortgagee’s fees, or
(b) the borrower or sponsor or affiliated entities.
The consultant cannot be paid from both sources.
3. The consultant cannot have any identity of interest with the borrower, sponsor or affiliated entity.
HUD may permit an exception to the rule if:
a) The consultant’s regular business is brokering and processing loans; and
b) The relationship is fully disclosed to and approved by HUD before an application for mortgage
insurance is submitted.
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B. Under MAP, the consultant’s sole role is to refer new business to a MAP Lender including information
supplied by a proposed borrower/sponsor.
1. The consultant’s fee must be paid solely from the Lender’s fees, and must be disclosed in the MAP
Lender’s underwriting narrative.
2. The consultant cannot have any identity of interest with the Borrower/sponsor or any affiliated
entity.
There is no additional role for the consultant. HUD only accepts application packages from, corresponds with,
and relies on information submitted by an approved MAP Lender. HUD will only deal with employees of the
MAP Lender and only accept documents signed by authorized signatories of the MAP Lender. MAP Lenders
are expected and authorized to hire third party contractors for appraisal, architecture and cost, market analysis,
environmental reports and environmental site assessments, and specialized reports related to any of these
technical disciplines; involvement by a consultant or broker in any of these functions is unacceptable under the
MAP Program.
2.5
MAP Lender Underwriting and Construction Loan Administration
Requirements
A. Major Duties and Responsibilities of the Underwriter.
The MAP Underwriter performs the mortgage credit and real estate underwriting function and must be
a full time employee. The third party contractors cannot have any identity of interest with the
Borrower/sponsor or any affiliated entity. The MAP Lender is responsible for underwriting the loan.
This responsibility necessarily requires the lender’s oversight, acceptance and recommendation to
HUD for approval of the conclusions and recommendations of the third party reports, except as
modified, explained, and justified in their underwriting.
The Underwriter or the Construction Loan Administrator is responsible for management of the
Lender’s responsibilities during the construction period.
Duties and responsibilities associated with the application underwriting are as follows:
1. Make a determination of the acceptability of the general contractor, supervisory architect,
management agent, the sponsor, the Borrower, if formed, and its principals through a thorough
analysis of their experience, credit, character, financial condition, and motivation for
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ownership (e.g., are they a merchant builder, plan to hold for long term, refinancing balloon
debt), availability of assets for closing and adequacy of income for total obligations.
2. Use trade references, bank references, credit data and construction experience resumes in
analyzing the construction capability of the general contractor including financial stability, and
ability to complete the project in light of their responsibility for other projects in progress.
3. Determine the recommended maximum mortgage amount and other key terms of the loan.
4. Engage all third party consultants and analysts, provide oversight and effective supervision of
work performed under their contracts to ensure their deliverables meet MAP Guide
requirements and support the underwriting recommendation. The Underwriter oversees
packaging of the loan, and recommends loan approval (or rejection).
B. Duties and responsibilities of the Construction Loan Administrator during the construction period
are:
1. Initial distribution of mortgage proceeds into various accounts and maintain a record of control
and disbursement thereafter.
2. Determine construction cost (as approved by the HUD inspector), architect fees and carrying
charges payable under request for advances of multifamily mortgage proceeds, prepare written
reasons for modifications as necessary.
3. Recommend approval of construction change orders and recommend release of both on-site
and off-site escrow funds, citing special requirements or conditions of approval as necessary.
4. Protect HUD’s interest by assistance and oversight of the resolution of construction disputes,
delays, costs overruns, and related problems.
C. Major Duties and Responsibilities of HUD.
1. During application underwriting:
a. Review the Lender’s mortgage credit report(s) regarding the acceptability of the sponsor,
Borrower, and its principals, and the contractor.
b. Perform the Active Partner Performance System (APPS) Electronic 2530 Property
Submission review or successor previous participation review process.
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c. Determine the maximum mortgage amount, financial settlement requirements, and other
key terms of the loan.
d. Determine the project’s financial feasibility and the acceptability of the market.
e. Review initial and final closing documents for compliance and acceptability.
2. During the construction period:
a. Review and approve the Lender’s proposed initial distribution of mortgage proceeds.
b. Provide for construction inspections on behalf of HUD.
c. Require the Lender to ensure resolution of construction problems and disputes.
d. Approve construction change orders.
e. Review the borrower’s cost certification based on HUD allowed costs.
f. Determine the final maximum insurable mortgage.
g. Review and approve the final distribution of mortgage proceeds.
2.6
Electronic Capability and Internet Access
MAP Lenders must have electronic capability and internet access. HUD will post information on its web
site and will transmit messages to Lenders and to the lending community by electronic mail, often with
attached documents, Mortgagee Letters, or HUD Housing Notices. Much of the information required by
HUD must be submitted electronically.
Lender and Underwriter approval requests sent to the Multifamily Asset Counterparty Oversight Division
should include one paper copy and an electronic version.
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Identity of Interest
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Identity of Interest
A. Introduction.
The term “Identity of Interest” is used in 24 CFR subpart Y (e.g., 24 CFR 1530(b)(6).) A
prohibited Identity of Interest is referred to in this Section as a “Conflict of Interest”.
MAP Lenders may not have a Conflict of Interest that would:
1. undermine the independence and integrity of the MAP Lender’s underwriting, credit review
process, and loan closing process;
2. obscure the lines between the MAP Lender’s fiduciary responsibilities to the investor and its
responsibilities to HUD;
3. represent an unfair competitive advantage to the MAP Lender; or
4. represent an unfair business practice with the Borrower or any of its affiliates, e.g., due to a
lack of disclosure or skewing arm’s length incentives.
Unless explicitly permitted pursuant to this section or approved in writing by HUD, an Identity of
Interest (IOI) relationship between a MAP Lender and any party related to the MAP loan being
processed creates a Conflict of Interest and is prohibited.
HUD considers certain prohibited payments and/or promises by a MAP Lender to be a violation of
24 C.F.R. 200.1530(b)(7), which reads:
payment by, or receipt of a payment by, a MAP lender of any kickback or other consideration,
directly or indirectly, which would affect the lender’s independent evaluation, or represent a
conflict of interest, in connection with any FHA-insured mortgage transaction.
Certain payments and/or promises could further violate the following Lender’s Certificate (HUD92434M) and the Request for Endorsement (HUD-92455M, Certificate of Lender) provision:
Lender has not made or offered, and shall not make or offer, any guarantees, pledges,
reservations of sums to become due, or other inducements to any entity or person to make
loans or advances which Lender would be prohibited from making under the terms of this
Section.
Lenders who violate the prohibition against IOIs may be subject to enforcement action by the
Department, including, but not limited to, sanctions under 24 CFR part 200, subpart Y (MAP
Lender Quality Assurance Enforcement) and part 25 (Mortgagee Review Board).
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Prohibited Conflicts of Interest, and acceptable Identity of Interest relationships and permissible
exceptions are detailed in this section; examples are provided in Appendix 2. IOI relationships
which could be a Conflict of Interest must be disclosed and reported to the Multifamily Asset
Counterparty Oversight Division (MACOD). Because determining whether an Identity of Interest
is acceptable or not is inherently complex and may lead to enforcement action, Lenders and other
participants should obtain written HUD approval prior to proceeding when there is any question
whatsoever. MACOD will provide responses to written requests for IOI approvals pursuant to this
section.
B. Definitions.
In this section the term “MAP Lender,” unless otherwise specified, includes the FHA-approved
MAP Lender, its parent company, subsidiaries, affiliates and any other related entities, and any
officers, directors, partners, members or employees of the MAP Lender, its affiliates and other
related parties. The term “Identity of Interest” is defined as a financial or family relationship
between a MAP Lender and another party related to the MAP loan transaction.
Shareholder and employment interests in widely-traded public companies resulting in an interest in
both the MAP Lender and another party on a MAP loan, which would otherwise be a prohibited
IOI, may be permitted depending on the specific roles and potential influence on the transaction.
The “Borrower’s Team” includes the FHA Borrower, Borrower’s counsel, general contractor,
subcontractor, architect, seller of the land, seller of the property, a third party consultant providing
reports supporting the transaction, any affiliates of the Borrower’s Team, or parties related to the
Borrower’s Team.
For the purposes of this section, “financial relationship” includes, but is not limited to, debt or
equity interests, employment, and fiduciary relationships. “Family relationship” includes, but is
not limited to, spouses, parents, siblings, children, grandparents, grandchildren, aunts, uncles,
mothers-in-law, fathers-in-law, brothers-in-law, and sisters-in-law.
C. Lender Responsibilities and General Guidance.
The MAP Lender is responsible for conducting appropriate commercially reasonable due diligence
to identify identities of interest and ensure no Conflicts of Interest exist. Because the guidance in
this chapter is necessarily general, the Lender is responsible for obtaining prior written approval
from HUD when there are questions as to whether an Identity of Interest is prohibited in any
particular situation.
In some cases, the MAP Lender is a Supervised Mortgagee, as defined in Section 1-2.A. of HUD
Handbook 4060.1, or a publicly owned company (or wholly owned subsidiary of a publicly held
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company) subject to oversight by the U.S. Securities and Exchange Commission. Such entities are
actively regulated by other federal agencies and thus HUD’s risk in identity of interest situations in
partially mitigated. Due to the size and number of shares and employees, it may be impractical for
such entities to provide certainty that there is no identity of interest. Accordingly, for purposes of
determining whether a prohibited Conflict of Interest exists, Supervised Mortgagees or publicly
owned MAP Lenders may define in their Quality Control Plan the MAP Lender as the applicable
operating entity responsible for origination and servicing of “agency business”, which would
include both FHA and GSE loans. The Quality Control Plan must describe the due diligence
process used to ensure shareholder or employee identities of interest are sufficiently remote such
that they will not undermine, or give the appearance of undermining, the MAP Lender’s or
Borrower’s Team member’s integrity and independence in the underwriting, credit review, and
loan closing process.
Generally, MAP Lenders who are Supervised Mortgagees or Publicly owned companies can
assume counterparties in MAP transactions with less than a 5% shareholder interest, or
depositories with less than $500,000 in an account, would not have a Conflict of Interest.
Lenders are expected to perform commercially reasonable and appropriate due diligence in
evaluating Borrower team members. Generally, certifications by Borrower Counsel, Design
Architects, and other professional advisors (including MAP Lender Third Party professional
reviewers) with no equity in the MAP transaction apply to themselves and other principals of their
firms and may be relied upon. Similarly, certifications by non-Identity of Interest General
Contractors may be relied upon as applying to principals of their firms and sub-contractors.
Borrower team members subject to Previous Participation review are assumed to be subject to
identity of interest disclosure and prohibitions, as are entities or persons with equity or other
financial interests in the borrower such that their role in the transaction provide material control or
influence over the development, operations, or management of the project.
D. Programmatic Guidance Section 223(a)(7) Refinancing Applications.
MAP Lenders with ownership interests in properties with currently FHA insured mortgages.
MAP Lenders with ownership interests in properties with currently FHA insured mortgages would
have an identity of interest if they refinanced the loan. This is not prohibited, so long as the MAP
Lender discloses to HUD the relationship in writing prior to submitting the Firm Commitment
application, and the terms and interest rate are commercially competitive at the time of the
refinancing.
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Secondary Financing Relationships. Secondary financing includes, but is not limited to:
a. loans secured by the project or made to the Borrower entity in addition to a first mortgage;
b. loans made to and/or secured by upper tier ownership interests in the Borrower entity (i.e.,
persons or entities with any ownership interest in the FHA loan Single Asset Mortgagor
Entity); and
c. other forms of mezzanine financing associated with the project proposed for the MAP loan
transaction.
Any proposed secondary financing relationship between the Borrower and the MAP Lender on a
MAP application constitutes an IOI and unless explicitly allowed in published program guidance
must be disclosed in writing to HUD, and the MAP Lender must receive written approval of the
IOI from MACOD before submitting an application. Such approval will not be unreasonably
withheld provided the relationship is fully disclosed and the parties demonstrate to HUD’s
satisfaction the relationship will not undermine the MAP Lender’s integrity and independence in
the underwriting, credit review, and loan closing process. These situations will require additional
scrutiny by HUD and the MAP Lender to ensure an appropriate valuation and compliance with
program requirements. In cases where a secondary financing IOI occurs during or after
processing, it must be disclosed in the manner provided in this section as soon as it is anticipated.
Bridge Loans and Balance Sheet Loans. An IOI is created in cases where a temporary bridge
loan is made by the MAP Lender to the Borrower, as well as in cases where a loan on the MAP
Lender’s balance sheet will be refinanced using FHA mortgage insurance. Existing or potential
Bridge and balance sheet loans require disclosure of IOIs at the earlier of Concept Meeting or
submission of the loan application. Generally such IOIs will be approved if HUD determines,
based on the facts and circumstances submitted in writing by the MAP Lender, that the
relationship does not:
1. undermine the integrity and independence of the underwriting;
2. circumvent program requirements; or
3. undermine program intent, for example by facilitating cash out on either a Section
223(a)(7) or a Section 223(f) loan greater than 80% LTV.
Tax Credit Syndicator or Investor Relationship. In all instances where there is an IOI or any
type of affiliation between the MAP Lender and the tax credit equity syndicator or investor, the
MAP loan must be processed, underwritten, and approved by the MAP Lender’s staff without
involvement by the affiliated tax credit equity syndicator’s or investor’s staff.
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MAP Lenders who are approved as Supervised Mortgagees and large publicly owned
companies with affiliated tax credit investment entities. With prior written approval from the
HQ Director of MF Production, certain MAP Lenders with tax credit investor affiliates may
originate FHA-insured MAP loans. Approval of such requests shall be conditioned on:
a. the MAP Lender is a Supervised Mortgagee, as defined in Section 1-2.A of HUD
Handbook 4060.1, or a publicly owned company (or wholly owned subsidiary of a publicly
held company) subject to oversight by the U.S. Securities and Exchange Commission;
b. and except where HUD agreed to a “Pre-Approval of Special Limited Partners As Interim
Replacement GP/MM for LIHTC Transactions”, the equity investor must remain in a
purely passive role throughout the term of the FHA-insured loan, including after the Tax
Credit compliance period ends.
MAP Lenders who are not Supervised Mortgagees or publicly held may still invest in tax credit
transactions, subject to compliance and certification that after the project’s placed in service date,
the affiliated tax credit equity syndicator or investor holds no more than a twenty five (25) percent
ownership interest in the Borrower entity.
Identity of Interest Servicing. MAP Lenders may occasionally seek to invest in multifamily
projects financed by another MAP Lender using the MAP program. If the Borrower has an IOI
relationship with a MAP Lender, that MAP Lender cannot assist in underwriting, purchase, or
service the loan until after final endorsement. The arrangement to assign the loan after final
endorsement is subject to full disclosure before processing begins, certification, approval by HUD,
and development of procedures implemented into each lender’s Quality Control Plan (QC Plan).
The risk must be mitigated pursuant to the following requirements:
1. The IOI relationship must be fully disclosed as a planned business practice in both
lenders’ QC Plans. With each application, the Underwriting MAP Lender must include
a certification that includes the applicable criminal penalty warning. The warning must
certify that the brokering lender had no involvement in the underwriting process, and
that the referring entity had a “firewall” such that only employees of the owner/ equity
investor affiliate of the broker provided information to the Underwriting MAP Lender.
2. The Underwriting MAP Lender must have made no specific written or oral obligation
to assign the loan to the IOI Map Lender after final endorsement. The Underwriting
MAP Lender must retain the right to assign the loan to any servicer, or to hold the loan.
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3. The IOI Map Lender must have made no written or oral obligation to purchase the loan
from the Underwriting MAP Lender. The IOI MAP Lender must retain the right to
purchase, or refuse to purchase, the loan.
4. Any dealings between the IOI MAP Lender and the Underwriting MAP Lender must be
arm’s length and independent at all times, including after issuance of a Firm
Commitment.
5. The IOI MAP Lender may not advise or assist the Underwriting MAP Lender in
processing the loan or with making underwriting decisions in any way.
6. The IOI MAP Lender cannot receive a broker’s or consultant’s fee from mortgage
proceeds.
7. HUD will only accept application packages, correspondence, and information related to
the loan submitted by the Underwriting MAP Lender.
8. The IOI MAP Lender may not hire or interact with third-party contractors other than
the equity affiliate responding to inquiries from the Underwriting MAP Lender’s third
parties. Such interaction must be isolated by the firewall described in the Quality
Control Plan.
9. Third-Party contractors cannot have any IOI with the Borrower or the Underwriting
MAP Lender.
10. Both lenders must have appropriate and acceptable quality control practices that
provide for an effective firewall. It must allow objective and independent origination
and underwriting. Such practices and procedures must be defined in each MAP
Lender’s quality control plan, and approved by the Asset Management Counterparty
Oversight Division (MACOD).
E. Prohibited Business Practices.
Inducements. A MAP Lender cannot have arrangements with Borrowers for the purpose of
securing the Borrower’s business that may undermine the MAP Lender’s integrity in underwriting
and credit review process or provide an unfair competitive advantage to the MAP Lender.
Following are examples of prohibited MAP Lender inducements. The MAP Lender cannot:
a. provide “kickbacks” to Borrower;
b. issue loans between affiliates of either the MAP Lender or the Borrower for the purpose of
meeting requirements for cash or financial capacity related to the MAP transaction;
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c. condition the provision of, or provide more desirable terms for other bank products
including Tax Credit investments by affiliated entities on engagement for an FHA insured
loan;
d. pay the Borrower’s costs for third party reports;
e. pay application fees;
f. offer to refund application fees on unsuccessful loan applications.
Note: this list is not intended to be exhaustive. Any similar payment made by MAP
Lender to the Borrower to secure loan origination business must be disclosed to and
approved in writing by HUD.
The prohibition on inducements does not prevent a MAP Lender from paying for updated third
party reports provided the transaction was already submitted with a Firm Commitment application
that was delayed in processing due to no fault of the Borrower.. The lender must provide to
MACOD and the Director of Multifamily Production in HUD Headquarters a written notice and
detailed explanation of any transaction in which such funds are greater than $10,000.
Gifts. A prohibited IOI can be created when the MAP Lender, Borrower, or other parties to a
MAP loan solicit or accept gifts from prohibited sources based on their business relationship. Gifts
less than $200 per year to a particular recipient are presumed to not constitute a prohibited IOI. A
gift cannot be conditioned on an agreement or obligation to do business related to a MAP loan.
Gifts given based on an existing business relationship outside of the MAP loan or incidental to
commercially reasonable and customary marketing practices are not prohibited unless the value,
amount, or circumstances undermine, or give the appearance of undermining, the integrity and
independence of the underwriting and credit review process. The MAP Lender’s Quality Control
Plan must address their policy on this topic.
Charitable Donations. From time to time MAP Lenders will make charitable donations to causes
that may create a conflict of interest. HUD does not prohibit charitable contributions by MAP
Lenders or borrowers. Such contributions, however, can result in a Conflict of Interest for MAP
purposes. If a donation to the charity was given by any party in a MAP transaction conditioned
upon an agreement or obligation related to a MAP loan, it would create a prohibited IOI whether
such condition is written or not. In situations HUD becomes aware of such contributions that may
constitute a Conflict of Interest, enforcement will be pursued if HUD determines the gifts were
intended for the purpose of competing for FHA mortgage insurance. The six main factors
considered by HUD are:
1. Whether or not the donor disclosed such charitable donations in advance. The donor
may provide documentation of monetary value, history of donations to a particular
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5.
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charity, history of donations to a variety of similar charities, or other information it
deems relevant to show that the donation is not based on, and would not influence the
underwriting of, a MAP transaction.
timing;
monetary value or amount of the gift;
implicit or explicit understanding that the contribution is a condition of doing the deal;
history of philanthropic contributions; and
the specific roles and relationships between the parties involved.
F. Disclosure Requirements.
1. Generally. Disclosure is required where there is an actual IOI, the appearance of an IOI, or
potential for an IOI between the MAP Lender and the Borrower’s Team or any other party to
the MAP loan. All questions and supporting documentation, including any additional
information requested by the Regional or Satellite Office, must be submitted to HUD
Headquarters. Send such requests to:
Director of Multifamily Housing Production, Headquarters
ATTN: Multifamily Asset Counterparty Oversight Division
451 7th Street, SW, Room 6134
Washington, DC 20410
FAX Number: (202) 401-9087
2. IOI Discovered Before Processing. If an Identity of Interest is identified and a MAP Lender
has not started processing, the MAP Lender must disclose the IOI to HUD and request HUD’s
written approval of the IOI before continuing; or in the alternative, the MAP Lender may
undertake one of the following measures:
a. review and submit the transaction under the traditional application processing program;
b. remove the IOI stakeholder from the transaction and process the transaction using MAP; or
c. immediately transfer the project to a new MAP Lender. The new MAP Lender cannot
assign the pre-application submission, the firm commitment application, the mortgage
insurance commitment, or the insured loan back to the IOI lender prior to Final
Endorsement.
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3. IOI Discovered During Processing. If an IOI becomes apparent during processing, a MAP
Lender must immediately stop processing, disclose the IOI to HUD and attempt to obtain
HUD’s written approval of the IOI before continuing; or in the alternative, the MAP Lender
may undertake one of the following measures:
a. transfer the transaction to the traditional application processing program. The Regional or
Satellite Office must completely reprocess all stages of the transaction; or
b. transfer the project to a new MAP Lender. The new MAP Lender may be required by the
Regional or Satellite Office to reprocess all or some stages of the transaction. At no time
prior to final endorsement can the new MAP Lender assign the pre-application submission,
the firm commitment application, the mortgage insurance commitment, or the insured loan
back to the IOI MAP Lender.
4. IOI Discovered After Firm Commitment. Such IOIs may reflect either a lack of
transparency, absence of due diligence, or negligence on the part of the MAP Lender. The
MAP Lender, and other involved parties, may be referred to investigative or enforcement
authorities. The Regional or Satellite Office must refer such transactions to MACOD.
G. Certification.
There are three exceptions when certification is not required: loan advances made in accordance
with Program Obligations; notes given to evidence additional financing charges owed by Borrower
to the MAP Lender as authorized in the MAP Guide and as disclosed pursuant to section (20)(h)
of the Lender’s Certificate (HUD-92434M or later designation) or section 21(f) of the Certificate
of Lender contained in the Request for Endorsement of Credit Instrument (HUD-92455M or later
designation), as applicable; or lender advances made pursuant to the Security Instrument (HUD94000M or later designation). In all other circumstances, the MAP Lender must certify and agree
that it:
1. does not have outstanding loans or advances to the Borrower’s Team, any of the sponsors, the
general contractor, or the architect for any purpose directly or indirectly related to the MAP
loan without prior written approval of HUD;
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2. will not make any loans or advances to the aforementioned parties;
3. has not made or offered, and shall not make or offer, any guarantees, pledges, reservations of
sums to become due, or other inducements to any entity or person associated with the MAP
loan.
H. IOI Tax Credit Equity Syndicator or Investor Representation and Warranty.
The affiliated tax credit equity syndicator or investor must not improperly influence the MAP
Lender on a LIHTC project. The MAP Lender and the affiliated tax credit equity syndicator or
investor must each provide the Regional or Satellite Office a specific Representation and Warranty
on each application submitted for a LIHTC project, which contains the following criminal warning
language:
1. The MAP Lender’s Representation and Warranty must state:
a. With respect to any LIHTC project loan that it will process under MAP:
(1) No officer or employee of _____________________ (insert the name of the affiliated
tax credit equity syndicator or investor) or any director or parent thereof will have any
loan-specific or decision making control or influence in ________________’s (insert
the name of MAP Lender) underwriting of the MAP loan except by providing factual
information to __________________ (insert the name of MAP Lender) in the same
manner as would be provided by an unaffiliated syndicator).
(2) _______________________ (insert name of MAP Lender) will not condition its
agreement to provide such financing on ______________ (insert the name of affiliated
tax credit equity syndicator or investor) being selected as the tax credit equity
syndicator or investor for the project to be financed by the MAP loan.
b. ___________________ (insert the name of MAP Lender) will notify HUD promptly, in
writing, during application processing of any change or event which causes the foregoing
Representation or Warranty to be materially untrue or inaccurate.
c. WARNING: “HUD will prosecute false claims and statements. Convictions may result
and/or civil penalties. (18 U.S.C. 1001, 1010, 1012; 31 U.S.C. 3729, 3802).”
2. The MAP Lender’s affiliated tax credit equity syndicator or investor’s Representation and
Warranty must state:
a. In the regular course of its business it syndicates or invests in tax credit equity investments
in multifamily affordable housing projects.
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b. With respect to any project loan that is to be underwritten by _______________ (insert
name of MAP Lender) and in which _______________ (insert name of affiliated tax credit
equity syndicator or investor) intends to make an equity investment or sell equity to other
investors:
(1) No officer or employee _____________ (insert name of MAP Lender) will have any
loan-specific control or influence in _______________’s (insert name of affiliated tax
credit equity syndicator or investor) processing of the sponsor’s application for tax
credit equity syndication or investment except by providing factual information to
________________ (insert the name of affiliated tax credit equity syndicator or
investor) in the same manner as would be provided to an unaffiliated MAP Lender.
(2) ___________________ (insert the name of affiliated tax credit equity syndicator or
investor) will not condition its commitment to syndicate or invest in the project equity
on debt financing for such a project being provided by _________________ (insert
name of MAP Lender).
(3) Except during the interim period prior to the placed in service date during which
_______________ (insert name of affiliated tax credit equity syndicator or investor)
may make an equity bridge loan to the project, neither ________________ (insert the
name of affiliated tax credit equity syndicator or investor) nor any affiliate or
subsidiary thereof will hold greater than a 25 percent interest in the 99 percent investor
limited partnership entity (or an equivalent percentage if owned as an LLC) of the
borrower.
c. WARNING: “HUD will prosecute false claims and statements. Convictions may result
and/or civil penalties. (18 U.S.C. 1001, 1010, 1012; 31 U.S.C. 3729, 3802).”
2.8
MAP Lender Application Package
The Lender’s application should include one hard copy and an electronic version. There is no specific
required application form for approval as a MAP Lender, but the information submitted must include the
following:
A. Exhibit A. Name of applicant, address, employer identification number, contact person or persons,
telephone and fax number, e-mail address, branch offices for multifamily business with address,
telephone and e-mail address, and the FHA Mortgagee ID Number.
B. Exhibit B. List of names and titles of those who are authorized to bind the lender in matters
involving an application, underwriting and origination of insured mortgages under MAP.
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C. Exhibit C. Type of FHA-Mortgagee (e.g., supervised or non-supervised), type of legal structure
(e.g., general corporation, limited liability corporation, partnership, housing finance agency or
other), whether the Lender is a subsidiary of another company, and if so, identification of the
parent company.
D. Exhibit D. Copy of most recent financial statements submitted to HQ Lender Approval Division
(not applicable to supervised mortgagees).
E. Exhibit E. Narrative discussion of the applicant’s method of operation in multifamily lending.
This will include whether it: a) services loans, b) is an originator that sells commitments or loans
to others, c) originates and holds loans in its portfolio; d) purchases loans from others and e) has
experience in construction loan administration. Also include the number, location and staffing of
branch offices it operates, any other information the applicant deems relevant in providing a clear
description of its business.
F. Exhibit F. Experience of the Lender in multifamily loan origination, for both conventional and
FHA insured loans. List the FHA insured loans for which Lender has received Firm Commitments
in the last five years and the number, name, location, original amount, HUD Office where
processed and whether the loan is in default has been assigned, or an election to assign the loan to
FHA has been filed, or the Lender has elected to foreclose on the loan. The extent of conventional
lending may be summarized rather than listing each conventional mortgage originated in the last
five years. It is important to summarize the extent of conventional multifamily experience, the
extent to which construction loan administration was involved and the number and percentage of
defaults and foreclosures. List any FHA or conventional loan that was sold since origination and
is serviced by another lender. Report on whether the sold loan is in default, foreclosure or has
been assigned to FHA. Default for these purposes means a loan whose payment is more than 60
days overdue.
G. Exhibit G. Narrative discussion explaining any elections to assign FHA loans for insurance
benefits for any Initial Endorsements that occurred after May 1, 1995.
H. Exhibit H. Resumes of the staff that will be responsible for the submission of MAP loan
applications, which demonstrate that the staff has the required multifamily experience.
I. Exhibit I. Experience in construction loan administration, if intending to perform this function.
Identify those persons authorized to sign advances, construction change orders and escrow
releases.
J. Exhibit J. Information regarding:
1. Lawsuits/claims/judgments filed or issued in the last three years against the applicant which:
a. Concern equal employment or lender discrimination prohibited by law, or
b. Are a result of, or might significantly affect, its multifamily lending business.
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2. Any criminal or civil charges brought against the applicant related to the mortgage lending
business.
K. Exhibit K. Certification by the Lender that it will certify with each pre-application submission and
application for mortgage insurance that it is in compliance with the identity-of-interest provisions
in the MAP Guide.
L. Exhibit L. An agreement that the Lender will open its files and records on FHA applications for
monitoring by HUD staff, including by the Multifamily Asset Counterparty Oversight Division
and the Office of Inspector General.
M. Exhibit M. A Quality Control Plan for underwriting and construction loan administration, if
applicable, of insured mortgages processed under MAP.
N. Exhibit N. Copy of Letter of Approval/HUD approval, Form HUD-92001-B, Branch Office
Notification Title I/ Title II, evidencing approval as an FHA Approved Multifamily Mortgagee.
2.9
Limitation on Requirements
A. There are no additional capital requirements for MAP Lenders beyond the Department’s minimum
net worth and liquidity requirements in 24 CFR Part 202.
B. There is no fee required by HUD for qualifying a MAP Lender.
C. MAP Lenders need to promptly notify the Multifamily Asset Counterparty Oversight Division if
there has been a change in approved signatories. MAP Lenders are expected to maintain at all
times the staff with the level of experience and qualifications required by this MAP Guide. Other
than Underwriters, Chief Underwriters (and Deputy Chief Underwriters), Construction Analyst,
and Administrators, the Multifamily Asset Counterparty Oversight Division will not approve or
disapprove of individuals working for MAP Lenders.
D. MAP Lenders must notify the Multifamily Asset Counterparty Oversight Division if there has
been a change of address of the home office for multifamily business, electronic mail address or
telephone number. If there is a change in ownership or if the lender has a material change in its
way of doing business, the lender must re-apply for MAP Lender status. If there is a change in the
MAP Lender’s name or in the name the Lender does business as (DBA), with no other substantive
changes proposed, the Lender must notify HUD of the change. The Lender must also include a
certification that there has been no change in ownership, principal staff or in the lender’s quality
control plan and procedures. Lenders must also notify the Multifamily Asset Counterparty
Oversight Division if they withdraw as MAP Lenders, even if temporarily.
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Monitoring by Multifamily Asset Counterparty Oversight Division
The applicant for MAP Lender approval agrees that it will make its files and records available to HUD
or HUD’s authorized contractors for such monitoring of MAP processed loans as HUD determines.
The Lender must retain the origination and underwriting files for seven years after Final Endorsement
(even if the loan has been sold.)
A. MAP Lenders are subject to monitoring and periodic on-site reviews by the Multifamily Asset
Counterparty Oversight Division to verify that the Lender(’s):
1.
2.
3.
4.
adheres to all statutory, regulatory and MAP Guide requirements;
underwriting decisions are consistent with the requirements of the MAP Guide;
technical processing is consistent with the requirements of the MAP Guide;
has complied with the conditions of the Firm Commitment and the requirements for Initial or
Final Endorsement; and
5. has complied with the requirements for construction loan administration in the MAP Guide.
B. The Multifamily Asset Counterparty Oversight Division will not commence reviews of origination
and underwriting documentation until after the Lender’s first MAP Firm Commitment has been
issued. Please note that the Multifamily Asset Counterparty Oversight Division reserves the right
to review any loans.
C. If a MAP Lender, or an authorized employee or agent of the Lender acting under the control and
supervision of the Lender, violates any program requirement including, but not limited to,
committing fraud, misrepresentation, or any violation described at 24 C.F.R. §§ 25.6 and 30.35(a),
HUD reserves its rights to initiate all legal action available to it under the law, including without
limitation action against the Lender under the contract of mortgage insurance and Mortgagee
Review Board requirements.
D. The review by the Multifamily Asset Counterparty Oversight Division is not a substitute for other
periodic audits and reviews by HUD, including a financial management review and a review of the
Lender’s quality control plan as required by HUD Handbook 4060.1 “Mortgagee Approval
Handbook.” Multifamily Production and other offices within HUD may perform monitoring
reviews.
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MAP Underwriter Approval Standards
MAP Lenders must have MAP-approved Underwriters working on the transactions submitted to HUD.
MAP Underwriters must be approved either by HUD or by a HUD-approved Chief Underwriter that is
employed by a MAP Lender. The process for certifying MAP Underwriters under both the traditional
model and the Chief Underwriter model are outlined below.
HUD will continue to approver MAP Underwriters for: currently approved Low Volume MAP Lenders
(less than a four-year trailing average of $100,000,000 in firm commitments annually) that choose not to
participate in the Chief Underwriting model, new MAP Lenders with less than 4-years MAP underwriting
experience (until they attain sufficient experience), and MAP Lenders with suspension or termination
enforcement actions within the previous four years. All other MAP Lenders must approve their MAP
junior underwriting staff pursuant to the Chief Underwriter process set forth further below.
HUD reserves the right to withhold or condition approval authority for MAP Underwriters. The basis for
Underwriter rejections or conditions to approval will be in writing. Lenders may appeal rejections or
conditions to approval to the Deputy Assistant Secretary for Multifamily Housing Programs. Staff not
involved in the original decision will review and respond to the appeal.
A. MAP Underwriter. A MAP Underwriter must be a full time salaried employee of the MAP
Lender. The Underwriter cannot be hired on a contract basis for a particular loan application.
Underwriter compensation cannot be based on loan production volume, nor may the underwriter
be compensated in a way that may be construed as a means of discouraging prudent risk
management. Applicants for MAP Underwriter designation may range from trainees to veteran
executives with years of experience; all are expected to document they have met the minimum
education and experience requirements expected of Underwriter trainees. The applicant must
demonstrate competence and the following qualifications:
1. Requirements: The applicant must have knowledge and skills in a variety of financial areas,
including:
a. General experience in banking, accounting, finance, commercial lending, and in
multifamily mortgage financing.
b. The ability to analyze corporate and personal financial statements including, but not limited
to, balance sheets, income statements, and statements of changes in financial position and
to evaluate the credit acceptability of individuals, partnerships, corporations, and other
entities.
c. A broad knowledge of lending practices for mortgages and construction loans and the
financial structures of individuals, partnerships, and other business entities.
d. The applicant must demonstrate recent, like-kind underwriting experience.
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experience shall be defined as actual underwriting experience obtained by underwriting a
funded multifamily loan within the previous 5 years. Like-kind experience shall be defined
as underwriting with comparable duties and responsibilities as required under the MAP
program.
2.
Application for HUD Approval of MAP Underwriters: One paper copy and a complete
electronic version of the application are to be included with the submission. One copy of the
written request for approval should be submitted by a senior officer of the MAP Lender with
signatory authority to HUD and include the following exhibits:
a. Resume of the Underwriter that demonstrates the specific qualifications, education and the
level of experience.
b. Documentation of successful completion of relevant education, and a HUD MAP training
certificate (or request for conditional approval to allow deferral of the MAP training
certificate).
c. List of loans (MAP and otherwise) processed and underwritten by the Underwriter that
reached Firm Commitment, certified and signed by a senior officer with authorized
signatory designation and by the underwriter applicant. The list must contain the following
warning code:
Warning: Title 18 U.S.C. 1001, provides in part that whoever knowingly
and willfully makes or uses a document containing any false, fictitious, or
fraudulent statement or entry, in any manner in the jurisdiction of any
department or agency of the United States, shall be fined not more than
$10,000 or imprisoned for not more than five years or both.
d. Additional supporting documentation may be requested by HUD.
B. Chief Underwriter. MAP Lenders that are responsible for approving their MAP Underwriters
pursuant to Section 2.11.A above must designate an employee as a Chief Underwriter that is HUDapproved. The designated Chief Underwriter will have delegated responsibility for approving
MAP Underwriters and Deputy Chief Underwriters. The Chief Underwriter must certify that the
MAP Underwriter or Deputy Chief Underwriter is qualified according to MAP Guide
requirements.
Ongoing eligibility to approve Underwriters will be determined by MACOD, by confirming the
following: the MAP Lender is in good standing; the Chief and Deputy Chief Underwriters are in
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good standing; the Chief Underwriter or Deputy has co-signed each application submitted by a
designated underwriter; and the Chief Underwriter asserts in their annual certification that their
Quality Control plan and underwriting staff are in compliance as defined herein.
1. Requirements:
a. The proposed Chief Underwriter must be approved, in writing, by HUD.
b. The proposed Chief Underwriter must be in good standing with the Department and in full
MAP compliance, defined as not been subjected to MAP disciplinary actions (probation,
suspension or termination), over the previous four (4) years.
c. The proposed Chief Underwriter must have evidence of ten (10) years prior underwriting
experience. The experience must include a minimum of five (5) years FHA/MAP
underwriting experience, with the remaining experience to be comprised of Ginnie Mae /
Fannie Mae / Freddie Mac, Risk Sharing, or other like-kind underwriting experience. The
experience need not be continuous, but must total 10 years. The proposed Chief
Underwriter’s application must include a listing of FHA loans underwritten and the
name(s) of the submitting Lender. At HUD’s discretion, the individual may request that 1year’s equivalent experience be granted for evidence of each 10 acceptably processed Firm
Commitment applications, for up to 5 years’ experience.
d. The proposed Chief Underwriter must demonstrate experience in the training, development
and oversight of Underwriter trainees. The application should include specific experience
with a list of all personnel trained.
e. The proposed Chief Underwriter may not hold a significant equity position, in or be a
principal of, the lender or any of the lender’s affiliates. Employee Stock Ownership Plans
and similar forms of compensation are permissible.
2.
Roles and Responsibilities:
a. Creation and oversight of the MAP Lender’s training and development program for
underwriting personnel.
b. Approving MAP Underwriters.
c. The MAP Lender’s compliance with statutory, regulatory and programmatic underwriting
processes, requirements and standards.
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d. Establishment and oversight of the MAP Lender’s Quality Control Process.
e. Reviewing, approving and cosigning all HUD mortgage insurance applications.
Submissions must be cosigned by the Chief Underwriter.
f. The Chief Underwriter may delegate responsibilities to the Deputy Chief Underwriter, but
the Chief Underwriter remains responsible.
g. Implementation of HUD recommended opportunities for improvement, to include findings
and observations gleaned from MAP Lender or property loan reviews.
3. MAP Underwriter Approval Process and Certification.
a. Approval. The MAP Lender and Chief Underwriter must provide a certification that the
MAP Underwriter or the Underwriter Trainee has complied with all experience and
training requirements detailed in this Guide. The MAP Lender and Chief Underwriter must
evaluate the prospective underwriter to ensure and commit to the following:
(1) Underwriter has completed and complied with the MAP Lender’s approved training
plan.
(2) Chief Underwriter has extensively reviewed the Underwriter Trainee’s underwriting
during the training period to ensure it complies with the MAP requirements, as well as
accurately represents the risk associated with the proposed loan.
(3) The Chief Underwriter has reviewed and ensured loan documentation submitted to
HUD during the training period was complete, and that the submission did not require
significant revision by HUD staff to correct errors or omissions.
b. Authorization. The MAP Lender and Chief Underwriter shall immediately notify HUD
and certify that the Underwriter or the Underwriter Trainee has satisfactorily completed the
Designation Criteria, and has been approved and designated to underwrite loans. The
designee is not authorized to begin underwriting until HUD is in receipt and acknowledges
the MAP Lender’s notification and certification.
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c. Rescinding Approval. Although HUD will rely upon designation and certification by the
MAP Lender, HUD reserves the right, with due cause and written notification, to deny or
rescind such approval, and otherwise hold the MAP Chief Underwriter accountable under
any of the following circumstances:
(1) Evidence that the Underwriter Trainee’s work product during the training period was
unsatisfactory.
(2) Prior incidences of poor underwriting that display a lack of knowledge or failure to
exercise prudent judgment.
(3) The Underwriter Trainee is listed on HUD’s LDP or debarment list.
(4) For other good cause.
d. Quality Control Reviews. Quality Control (QC) reviews prepared by the MAP Lender
must include confirmation that the Chief Underwriter and the Underwriter(s) are approved
and have satisfactorily completed all Designation Criteria, including, without limitation,
the MAP Lender’s approved training and approval requirements. During the Quality
Control process, the reviewer will ensure that each loan reviewed was underwritten by an
approved and designated Underwriter, and, if the Underwriter was approved within the
previous four years, the QC review should include a review of the Underwriter’s approval
package.
C. Deputy Chief Underwriter. The MAP Lender’s Deputy Chief Underwriter can perform all
functions delegated to the MAP Lender’s Chief Underwriter, but the Chief Underwriter remains
responsible for all actions of the Deputy Chief Underwriter. With notice to and approval by HUD,
the Deputy Chief Underwriter can also act as an interim Chief Underwriter to maintain business
continuity in emergency situations. In such an event, the MAP Lender must obtain HUD approval
for the Deputy Chief Underwriter to act for the Chief Underwriter if that person does so for more
than 3 months or for a replacement Chief Underwriter within 6 months of the MAP Lender’s initial
notification to HUD.
1. Requirements:
a. The proposed Deputy Chief Underwriter must be approved, in writing, by HUD.
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b. The proposed Deputy Chief Underwriter must be in good standing with the Department
and in full MAP compliance, defined as not been subjected to MAP disciplinary actions
(probation, suspension or termination), over the previous four (4) years.
c. The proposed Deputy Chief Underwriter must provide evidence of five (5) years prior
underwriting experience. The underwriter’s experience should include a minimum of three
(3) years FHA/MAP underwriting experience, with the remaining experience to be
comprised of Ginnie Mae / Fannie Mae / Freddie Mac, Risk Sharing, or other like-kind
underwriting experience. The experience need not be continuous, but must total five (5)
years. The proposed Deputy Chief Underwriter’s application must include a listing of FHA
loans underwritten and the name(s) of the submitting lender. At HUD’s discretion, the
underwriter may request that 1-year’s equivalent experience be granted for evidence of
each 10 acceptably processed Firm Commitment applications.
d. The proposed Deputy Chief Underwriter may not hold a significant equity position, in or
be a principal of, the lender or any of the lender’s affiliates. Employee Stock Ownership
Plans and similar forms of compensation are permissible.
e. Large MAP Lenders may designate more than one Deputy Chief Underwriter.
2.12
MAP Lender Underwriter Trainee Approval Requirements
An approved MAP Lender may train its in-house staff to be new MAP Underwriters. The lender must
establish a written development plan for underwriter trainees that include a combination of
commercial/multifamily training courses and on the job experience.
A. The Underwriter trainee must have successfully completed at least three underwriting, finance,
appraisal or environmental courses that demonstrate basic understanding of multifamily
underwriting concepts, one of which must be a multifamily/ commercial appraisal course. These
courses may be obtained through the American Bankers Association, Institute of Real Estate
Management, National Association of the Review Appraisers & Mortgage Underwriters, the
Mortgage Bankers Association of America (MBA), the Appraisal Institute or any other acceptable
training institution such as colleges and universities. Suggested courses include Commercial
Underwriting, Understand Your Construction Borrower, Analyzing Financial Statements,
Commercial Real Estate Financing and Valuation, Appraisal: Concepts and Applications,
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Appraisal Principles, Appraisal Procedures, Basic Income Capitalization, Advanced Income
Capitalization, Uniform Standards of Professional Appraisal Practice (USPAP).
Education used to meet Underwriter approval requirements must be comprehensive enough to
provide substantive background. In-depth specialized technical training provided by recognized
training institutions, trade associations, or private firms will be considered so long as the content
and duration of the class is analogous to a college level class. One day seminars or participation in
industry conferences are appropriate (and expected) for continuing education, but not sufficient to
meet the requirement for one of the three courses. Lenders or training providers may submit a
course syllabus to the Director of the Multifamily Asset Counterparty Oversight Division if they
have a question as to the sufficiency of a particular course to meet the requirement.
B. In addition to the training courses, HUD requires on the job training of a minimum of three years
continuous work experience in multifamily mortgage lending. The Underwriter trainee must work
on a minimum of three MAP applications that reach Firm Commitment. Only one Underwriter
trainee may assist the MAP approved Underwriter in completion of any MAP application which
should document that the trainee was supervised by only one mentor MAP approved Underwriter.
C. The MAP approved Underwriter and the trainee must sign the Narrative Summary and the
processing forms. An Underwriter trainee may assist the underwriter in completion of the
underwriting.
D. The MAP approved Underwriter must accept responsibility for all aspects of the underwriting of
the transaction as evidenced by the Narrative Summary and processing forms.
E. The Underwriter trainee must be a full time salaried employee of the MAP Lender. The trainee
cannot be hired on a contract basis for a particular loan application.
F. The trainee’s contribution and the specific tasks performed by the trainee should be stated in the
Narrative Summary.
G. Work completed by an Underwriter trainee must be under the direct supervision of the MAP
approved Underwriter and it is unacceptable for the underwriter to merely sign a form or
document prepared by a trainee without providing proper supervision. The mentor Underwriter
must add a paragraph in the Underwriter Certification to certify that he/ she has directly supervised
the underwriter trainee in completion of the specific tasks in the underwriting narrative and the
processing forms.
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H. One hard copy of the written request for approval should be submitted by a senior officer of the
MAP Lender with signatory authority to HUD and include the following exhibits. The application
should also include an electronic version.
I. A written development plan must be established for the Underwriter trainee, and submitted with
the application.
J. The application should include a resume of the Underwriter trainee that demonstrates the specific
qualifications, education and the level of experience outlined above and a HUD MAP training
certificate.
K. The application should include a list of MAP loans processed and underwritten by the trainee that
reached Firm Commitment, certified and signed by a senior officer with authorized signatory
designation and by the Underwriter trainee. The list must contain the following warning code:
Warning: Title 18 U.S.C. 1001, provides in part that whoever knowingly and
willfully makes or uses a document containing any false, fictitious, or fraudulent
statement or entry, in any manner in the jurisdiction of any department or
agency of the United States, shall be fined not more than $10,000 or imprisoned
for not more than five years or both.
L. The application should include an electronic submission of complete documentation of each MAP
transaction application. The documentation signed by the trainee and co-signed by the mentor
underwriter must include:
1. A copy of Underwriter’s Narrative that clearly identifies the specific tasks performed by
the underwriter trainee.
2. A copy of completed Form HUD-92264-A and other forms and / or exhibits for the type of
mortgage proposed that require a mortgage credit analysis. (Refer to Chapter 8 and
Appendix 4)
3. A copy of the Master HUD-92264.
4. An Identity of Interest Certification as required by Section 11.2.F, signed and dated by the
Underwriter trainee only.
A hard copy of the MAP transaction application is not required and should not be submitted.
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M. Underwriter candidates that have successfully completed the MBA’s six month FHA Multifamily
underwriting course will receive credit toward the experience and education requirements.
Completion of that course will:
1. fully satisfy the requirement to complete three courses;
2. fully satisfy the requirement to complete a MAP training course;
3. satisfy half of the three transactions requirement; and,
4. satisfy half of the three years of experience requirement.
In satisfying half of the FHA MAP Underwriter requirements in #3 and #4 above, the candidate
may elect to utilize the course completion to fulfill either two transactions/one year, or one
transaction/two years of the requirements. The applicant should submit evidence of completion of
the MBA MAP Underwriter course, and indicate how to utilize the completion toward the
requirements.
2.13
MAP Underwriter Transfers
A. MAP Underwriters that have previously been approved by HUD, and that are in good standing,
may apply for transfer to another approved MAP Lender.
B. Application: One copy of the written request for approval along with an electronic version should
be submitted by a senior officer of the MAP Lender with signatory authority to HUD and include
the following exhibits.
C. The application should include:
1. Resume of the underwriter that demonstrates the specific qualifications, education and the
level of experience.
2. Evidence of prior MAP Underwriter approval.
3. Most recent HUD MAP training certificate.
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4. List of MAP loans processed and underwritten by the underwriter that reached Firm
Commitment, certified and signed by a senior officer with authorized signatory designation
and by the underwriter applicant. The list must contain the following warning code:
Warning: Title 18 U.S.C. 1001, provides in part that whoever knowingly and
willfully makes or uses a document containing any false, fictitious, or fraudulent
statement or entry, in any manner in the jurisdiction of any department or
agency of the United States, shall be fined not more than $10,000 or imprisoned
for not more than five years or both.
5. A detailed list of all prior MAP loan assignments in which the Underwriter was affiliated with,
to include a detail of the claim’s circumstances and any mitigations applicable.
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Chapter 3
Programs
3.1
General Program Requirements
This chapter contains the basic requirements for FHA multifamily mortgage insurance programs for which
lenders can submit Pre-applications and applications for Firm Commitment under MAP.
The following requirements apply to all FHA multifamily mortgage insurance programs:
A. Regulatory Agreement. All borrowers must execute a HUD Regulatory Agreement governing the
operation of the project. The Regulatory Agreement is recorded at Initial Endorsement.
B. Single Asset Mortgagor Entity. The mortgaged property must be the only asset of the borrower
entity and there may not be more than one borrower entity. Natural persons or Tenants-in-Common
ownership structures (including entities such as Delaware Statutory Trusts) are not permitted as
mortgagor entities, though they may hold “upper-tier” interests (i.e., they may have an ownership
stake, such as a partnership interest, in the Single Asset Mortgagor Entity,). Waiver authority is
reserved for the Director, Office of Multifamily Production HQ and must be obtained prior to a
Multifamily Regional Center or Satellite Office accepting an application for mortgage insurance which
does not conform to these prohibitions.
C. Non-recourse. The HUD mortgage note will contain a non-recourse provision as to the mortgagor
entity. Notwithstanding this provision, certain parties may be held personally liable to the extent of
losses arising from certain “bad acts” and malfeasance, as set forth in the Regulatory Agreement.
Such parties will be identified in the Firm Commitment.
D. Interest rate. The interest rate on a HUD insured loan is negotiated between the borrower, and the
mortgagee (and if applicable, the Ginnie Mae investor) and must be locked in by the time of Initial
Endorsement. Payment of discounts by the mortgagor to buy down an interest rate is acceptable
during negotiations prior to Initial Endorsement. Any change in the mortgage amount due to a change
in interest rate must be reflected in an amendment to the Firm Commitment before Initial
Endorsement, and may require an additional loan approval. The Mortgage Note, HUD-94001M,
provides for the same or different interest rates for the construction and permanent financing periods.
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E. Amortization plan. All HUD insured mortgages must amortize through a level annuity monthly
payment plan (LAMP), with equal monthly payments of principal and interest. Other variations are
not permissible. This restriction does not prevent tranches within promissory notes (e.g. A and B
pieces).
F. Loan Terms. The maximum loan term is the lesser of any limits included under the applicable Section
of the Act, 40 years for new construction/substantial rehabilitation, 35 years for Section 223(f)
purchase/refinancing, or 75% of the remaining economic life of the property.
G. Prepayment Restrictions. The Section 223(f) program limits prepayment during the first five years of
the loan. For other Sections of the Act, HUD permits but does not impose, prepayment restrictions on
insured loans. Prepayment restriction provisions cannot include HUD consent as a condition to
prepayment of the loan by the borrower.
H. HUD application fee. Under MAP (and the Section 213 program), HUD requires a fee of $3 per
thousand dollars of the requested mortgage amount for review of the Firm Commitment application. The
application fee (also known as “exam fee”) is considered earned at HUD acceptance of the application for
processing and is nonrefundable. For market rate new construction or substantial rehabilitation
transactions, one half of the application fee is due with the submission of the pre-application package and
the other half is due with the application for Firm Commitment. For affordable new construction or
substantial rehabilitation proposals and for any refinancing or acquisition transactions, the entire amount is
paid at the Firm Commitment stage.
For Section 223(a)(7) transactions processed under MAP (whether or not there is an Identity of Interest
between the borrower and lender), the application fee is $1.50 per thousand dollars of the requested
mortgage amount.
For Traditional Application Processing (TAP) loans, the application fee is $5 per thousand dollars of the
requested mortgage amount for market rate transactions and $3 per thousand dollars of requested mortgage
amount if the transaction meets HUD’s definition as Affordable housing or is a Section 223(a)(7) loan
processed TAP rather than under MAP.
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I. HUD inspection fee. The HUD inspection fee is $5 per thousand of the mortgage amount for new
construction and $5 per thousand of improvement costs for substantial rehabilitation. There is no
inspection fee for Section 223(a)(7) projects (even if there are repairs). For loans insured pursuant to
Section 207/223(f), the inspection fee is the following:
1. $30 per unit where the repairs/improvements are greater than $100,000 in total but $3,000 or
less per unit.
2. The greater of $30 per unit or 1% of the cost of repairs or $1,500, where the
repairs/improvements are more than $3,000 per unit.
3. $1,500 where the total repairs/improvements are less than $100,000, which may be decreased by
the Regional Center or Satellite Office, if the lender elects to take responsibility for the
inspection.
J. Mortgage insurance premium. The mortgage insurance premiums are established by the Firm
Commitment and may not be changed after initial endorsement. The construction period and annual
mortgage insurance premiums (MIP) are based on a percentage of the mortgage amount and may vary,
depending on the insurance program and on the MIP schedule posted by HUD each fiscal year.
The initial premium is payable in advance at initial endorsement. Unless revised in a Federal Register
Notice, this “up front” premium is the same for all market rate and affordable refinancing transactions:
•
•
•
1% for Section 223(f) loans,
½% (50 basis points) for Section 223(a)(7) loans, and
New Construction or Substantial Rehabilitation loans include a capitalized mortgage
insurance premium based on the mortgage amount and the number of years (including a
portion of a year) of the estimated construction or rehabilitation period.
K. Lender fees and charges. For programs other than Section 223(a)(7), the maximum financing and
placement fees the lender may charge is limited to a total of 3.5% of the mortgage amount. This 3.5%
maximum can consist of any combination of origination, financing, and permanent placement fees as
long as it also includes the lender’s legal fee. Financing and placement fees up to 5.5% are
permissible in bond transactions. Third party costs (e.g., appraisal, market study, CNA, and other
organization costs) may be included as mortgageable soft costs in the mortgage calculations, and are
not included in the limitation on lender fees. See Section 11.5 for additional provisions regarding loan
fees and charges.
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The lender is prohibited from advancing fees for payment of discount fees on behalf of the borrower.
Waivers of this provision must be granted in writing by HUD Headquarters.
L. Definition of Affordable Housing. Affordable housing in the context of FHA multifamily mortgage
insurance programs is defined as projects meeting both of the following requirements:
1. Rent and income restrictions must be imposed, monitored and enforced by a governmental
agency for at least 15 years after Final Endorsement, and
2. Either
(a) a recorded Regulatory Agreement requiring the project to meet at least the minimum
LIHTC restrictions of 20% of units at 50% of area median income (AMI), or 40% of units
at 60% of AMI, with economic rents (i.e. the portion paid by the residents) on those units
no greater than LIHTC rents, or
(b) a Project-Based Section 8 contract for 90% of the units.
Projects need not use LIHTCs to qualify for affordable underwriting so long as they meet the
above requirements.
M. Fair Housing and Equal Opportunity. Borrowers, management agents, contractors and
subcontractors must comply with HUD Fair Housing and Equal Opportunity requirements. Such
requirements include selection of occupants, employment, and project accessibility (See 24 CFR Part
100 and subsequent Sections), regardless of race, color, nationality/ethnicity, religion, sex, disability
and familial status (children of all ages and pregnant women) which are all Fair Housing Act protected
classes. Discrimination by age is also prohibited and the Equal Access Rule (24 CFR 5.105(a)(2))
provides for non-discrimination based on actual or perceived sexual orientation, gender identity or
marital status.
Affirmative Fair Housing Marketing requirements are addressed in Section 10.9 of this Guide. Also
see “Affirmative Fair Housing Marketing to Fair Housing Act Protected Classes” (24 CFR Part
200.600 and Handbook 8025.1 Revision 2), and “Nondiscrimination Based on Handicap in Federally
Assisted Programs and Activities of the Department of Housing and Urban Development” (24 CFR
Part 8).
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Fair Housing violations may result in enforcement actions including but not limited to Limited Denial
of Participation.
N. Previous Participation. Individuals and entities in control of a project are subject to a previous
participation review as set forth in 24 C.F.R. Part 200, as the same may be amended from time to time,
and must submit information regarding previous participation in governmental housing transactions
either via the electronic Active Partner Participation System (APPS) or on Form HUD-2530, or any
successor system or form, for approval for participation in any mortgage insurance program.
Invitation Letters or Firm Commitments may be issued conditioned on Previous Participation
approval, assuming no critical findings and that any flags can be resolved without being presented to
the Multifamily Participation Review Committee.
O. Elderly or Age Restricted Housing and Fair Housing Act Occupancy Requirements
General eligibility requirements.
1. For FHA Multifamily mortgage insurance programs. In order to be eligible for FHA mortgage
insurance, properties proposing to restrict occupancy to elderly families or elderly persons must
comply with one of the following three occupancy categories:
A. Statutorily authorized occupancy restrictions, including authorized programs in which the head
of household (HOH) is 62 years of age or over (“62+ HOH”). Properties proposing to restrict
occupancy to certain populations pursuant to specific statutory authority may be eligible for
FHA mortgage insurance. This category includes, without limitation, properties operating
under programs in which, pursuant to statutory authority, HUD has approved restricting
occupancy to a “mixed use” population including elderly and non-elderly disabled families.
Section 231 is one such program. This category also includes, without limitation, properties
restricting occupancy in accordance with statutory authority provided under Sections 221 or
236 of the National Housing Act or Section 8 of the United States Housing Act of 1937.
Several of these programs authorize properties to restrict occupancy to households in which at
least one person is 62 years old and which may include children under the age of 18. This is
FHA’s long standing definition of elderly families and has been referred to in previous FHA
guidance as “62+ HOH”. A property operating under this design cannot discriminate against
elderly families with children in its admission and occupancy policies. If a program has
statutory authorization for a specific kind of occupancy restriction, an exemption from the Fair
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Housing Act’s familial status provisions is not needed to operate the property in accordance
with that program.
B. Housing primarily for persons age 55 and older. (55+ Exemption). HUD does not permit
projects with occupancy restricted to age 55 and older under any multifamily New Construction
programs. Existing properties that restrict occupancy to households in which at least one person
is at least 55 years old may be eligible for FHA mortgage insurance for refinancing or
acquisition financing if they qualify for an exemption from the familial status provisions of the
Fair Housing Act and the program complies with all requirements set forth at Section 3.1.O.2.B
below. To qualify as housing “intended and operated for occupancy by persons 55 years of age
or older,” the housing provider must meet all three of the following criteria:
i) at least 80 percent of the occupied units are occupied by at least one person who is
55 years of age or older;
ii) the housing community or facility publishes and adheres to policies and procedures
that demonstrate the intent to serve persons 55 years of age and older; and
iii) the housing facility or community complies with the rules issued by HUD for
verification of occupancy.
42 U.S.C. § 3607(B)(2)(C)(i)-(iii). HUD’s implementing regulations at 24 C.F.R. part
100 address these three requirements in greater detail: the 80 percent minimum
occupancy requirement outlined in (i), above is addressed at 24 C.F.R. § 100.305; the
assessment of intent outlined in (ii), above is addressed at 24 C.F.R. § 100.306; and the
verification requirements outlined in (iii) above are addressed at 24 C.F.R. § 100.307.
Applicable properties must have complied with the Fair Housing Act’s conversion rules,
including the rule covering properties intending to convert from non-exempt to exempt housing
after May 3, 2000. In these projects, the owner/borrower of an existing property must apply
neutral admission policies (admitting otherwise head of household age-eligible families with
children) until the 80 percent threshold of the exemption is satisfied. For properties constructed
after May 3, 2000, the new construction rules dictate that such properties may discriminate
against families with children until 25 percent of its units are occupied. Once the 25 percent
threshold is reached, at least 80 percent of the occupied units must have a resident who is 55
years of age or older. If the property does not meet the 80 percent requirement once the 25
percent occupation threshold is reached, the owner/borrower may not thereafter exclude or
otherwise discriminate against families with children.
The Fair Housing Act prohibits “dual purpose housing facilities.” A housing facility or
community may not avail itself of the 55 and older exemption if it designates some units,
sections or buildings for persons age 55 and older, while designating other units, sections or
buildings for families with children. See 54 Fed. Reg. 3232, 3252 (January 23, 1989).
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Furthermore, properties applying for purposes of FHA mortgage insurance must be “one
marketable, manageable real estate entity”. Any property proposing one FHA insured loan,
with separate management agreements and procedures for a portion of the units or buildings
restricting occupancy to older persons age 55+ or older and another portion to other occupancy
regimes will generally not be considered one manageable entity and thus not eligible for
mortgage insurance.
C. Housing solely for persons age 62 and older. Properties proposing to restrict occupancy
exclusively to persons 62 years of age or older may be eligible for FHA mortgage insurance, but
only pursuant to the Section 231 program, pursuant to Section 3.1.O.2.C below. Although
housing intended for, and solely occupied by, persons 62 years of age or older is a recognized
exemption from the familial status provisions of the Fair Housing Act, 42 U.S.C. §
3607(b)(2)(B), it is FHA’s policy only to allow this restriction on occupancy for Section 231
transactions. Therefore, this category is available only for Section 231 transactions.
Note: Age-related restrictions that are not eligible for FHA mortgage insurance programs. The
Fair Housing Act recognizes another exemption from its familial status provisions, namely for
housing “provided under any State or Federal program that the Secretary determines is
specifically designed and operated to assist elderly persons (as defined in the State or Federal
program)” 42 U.S.C. § 3607(b)(2)(A). Although this is a recognized exemption to the Fair
Housing Act’s familial status protections, it has not heretofore been necessary to rely on this
exemption in the context of MAP multifamily insurance processing. Therefore, FHA policy
requires a property to fit into one of the other three categories described in this section 3.1.O.1.
2.
Additional FHA mortgage insurance requirements applicable to specific project types. This
section lists additional requirements relating to proposed age-restrictions for each of the kinds of
projects listed.
A. Market Rate Projects other than those applying under Section 231. For purposes of this
section, market rate projects are those applying for New Construction or Substantial
Rehabilitation or Acquisition or Refinancing (including Section 213 Cooperative projects), that
do not meet the criteria stated in Section 3.1.L. for Affordable projects. Except for projects
applying under Section 231, market rate applications for age-restricted projects must have all
units head of household 62 years or older, and cannot exclude non-elderly family members
including children.
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B. “Affordable” Projects seeking to use the 55+ Exemption under the Fair Housing Act to restrict
housing. Projects availing themselves of the 55+ Exemption may be eligible for FHA mortgage
insurance if: (i) the project is an affordable property (as defined in Section 3.1.L); (ii) the
project is pursuing FHA mortgage insurance for refinancing or acquisition of existing housing
under Section 223(f) or 223(a)(7); (iii) the project is already availing itself of the 55+
Exemption for at least the previous three years and is not using FHA mortgage insurance to
facilitate transition into the use of the 55+ Exemption; and (iv) there is no statutory or
regulatory restriction limiting eligibility to another category of persons (for example persons or
heads of household who are age 62 or older.) Project based Section 8 rental assistance and
other assistance have programmatic terms that limit eligibility and thus such projects may not
avail themselves of the 55+ Exemption. As a condition of approving FHA mortgage insurance
for such projects, the project may be required to document (i) restrictions requiring housing
primarily for persons 55 and older, such as through use agreements (LURA or other regulatory
agreement) and/or bond documents; (ii) preference points allocated for applications containing
such restrictions under qualified allocation plans; or (iii) other affordable properties with
externally-imposed restrictions consistent with the 55+ Exemption (e.g., zoning laws, local
bonds, and affordable housing trust funds providing preference points for applications
containing such restrictions).
These potentially eligible properties must operate in full compliance with the 55+ Exemption
in the Fair Housing Act in order to impose age restrictions and exclude children.
Multifamily HUD staff should consult with OGC prior to accepting an application for
FHA mortgage insurance for properties operating under the following programs and
seeking to take advantage of the 55+ Exemption:
• Old Section 202 Prepaid
• Refinance of Prepaid Section 202
Such properties may or may not be eligible to receive new FHA financing.
C. Section 231 Projects, including both Market Rate and Affordable projects. Section 231
projects have statutory authority to serve persons who are 62 years old or older as well as
statutory authority to serve non-elderly and disabled families. FHA may approve transactions
in which up to 25% of the units are available to non-elderly disabled families. See section
3.1.O.1.A. Section 231 projects do not require a specific exemption from the Fair Housing Act
because they are statutorily required to provide housing solely to persons who are 62 and over.
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3. Certifications.
To be eligible for FHA mortgage insurance, a project operating under the 55+ Exemption must
provide a Certification of Compliance with the Fair Housing Act by the borrower. A sample
template is included in Appendix 3C of this guide. In support of the certification, the borrower
must provide the governing age restriction documents and management documents indicating the
property complies with the 55+ Exemption. Governing age restriction documents include use
agreements, bond documents, tax credit qualified allocation plan and application documents, and
zoning documents, as applicable. Management documents include leases, occupancy policies,
marketing plans, and affirmative fair housing marketing plans, as applicable. Though such
management documents may be sufficient to establish eligibility, processing staff should
encourage applicants to provide documents such as use agreements, relevant zoning documents, or
bond documents, whenever available. See 24 C.F.R. § 100.306 for examples of other relevant
documents to be considered.
If an FHA-financing-eligible property certifies as a 55 or older property, it is important for
processing staff to verify when the property began operating as such. The regulations, at 24 C.F.R.
§ 100.305(e), specify that properties had the opportunity to establish eligibility for this exemption
until May 3, 2000. After this date, existing projects could avail themselves of this exemption only
if they met the criteria defined in the certification through neutral admission policies.
4. HUD Review Requirements.
HUD processing staff should review the certification to determine whether it is consistent with the
age restriction and management documents submitted by the property. Further, processing staff
should review the certification, age restriction, and management documents to ensure that the
project is not operating as a “dual purpose” property in contravention of the Fair Housing Act.
FHA MAP Lender applications and underwriting must document, and HUD processing staff must
verify, the property’s compliance with the Fair Housing Act by requesting and then analyzing the
governing age restriction and management documents to determine whether the documents clearly
impose a 55 or older restriction that is compatible with the 55+ Exemption.
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5. Services. Projects with extensive service packages or otherwise specifically designed for elderly
occupancy such that all or a portion of the units would be eligible under Section 232 of the
National Housing Act are not eligible for MAP insurance programs. The following are typical
Section 232 project characteristics that are not eligible for multifamily mortgage insurance or MAP
processing (whether elderly or non-elderly):
a. Projects such as nursing homes, intermediate care facilities, board and care homes, assisted
living facilities and day care in eligible health care facilities as defined under Section 232, or
projects that contain comparable characteristics.
b. Projects in which any percentage of the units must be licensed or regulated by the state or
municipality in which the facility is located, other than a standard rental housing occupancy or
operating license.
c. Projects in which the borrower is required to obtain a Certificate of Need or comparable
documentation from the state or municipality.
d. Elderly housing developments that provide “continuous protective oversight” services for
residents in the manner defined under Section 232.
e. Residential accommodations including: a) programmatic restrictions on the number of
bedrooms per unit from efficiency through 3 bedroom units, b) non-self-contained units, i.e., a
bathroom shared by different residents, or c) a kitchenette or less than what would constitute
standard, full kitchen equipment.
f. Mandatory resident meal requirements.
g. Other resident services made a mandatory condition of occupancy.
h. Non-shelter and optional services included in the underwriting of net operating income.
The prohibition on services and licensure discussed in this sub-section does not apply to formerly
or currently HUD-held or FHA insured multifamily projects which received Assisted Living
Conversion Program Grants for less than 75% of the units.
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6. Meals Service Exceptions.
a. Refinancing HUD insured or HUD assisted properties under Sections 221(d)(4) and 223(f). By
final rule published in 56 FR 42798, central kitchens and the provision of food services in
elderly housing projects are prohibited under any rental housing section of the National
Housing Act, including Sections 223(f) and 221(d)(4). The Regional Center or Satellite Office
Director may approve refinancing transactions for properties, with meal services, in refinanced
Section 202 and 202/8 direct loan properties, or properties with Project-Based rental assistance
which are currently insured under other Sections of the Act, if and only if:
1. Meals were provided before September 30, 1991 (the effective date of the regulation) and
have been continuously provided since that date,
2. Meals are provided on an optional basis, or with no more than one mandatory meal per day,
3. Income and expenses from the meal service are not included in the underwriting of net
operating income, and
4. The cost of the meals program is self-sustained by the revenue it generates based on HUD’s
review of the project’s financial statements.
b. Non-shelter spaces including formal dining areas with meal services for projects other than
those with Project-Based rental assistance and a current Section 202 or HUD-insured loan are
not eligible for multifamily mortgage insurance, even if they are provided to residents on an
optional basis.
7. Prohibition on Founder’s Fees. "Founders' Fees," "admission fees," or similar types of initial
occupancy or entry payments are prohibited.
P. HUD's Fiscal Procedures are contained in HUD Handbook 4410.1 Revision 2.
Q. Bridge or Gap Financing. Bridge financing is a short term loan that is secured by the property or by a
pledge of an interest in the borrowing entity, pending the start of a long-term permanent loan. Bridge
loans that are secured by the property (as distinguished from bridge loan used to fund equity during
construction and which is secured by ownership interests), are acceptable only in instances of
Insurance upon Completion and before the start of the FHA-insured permanent financing. Bridge
financing is permitted so long as the bridge loan is repaid no later than the time of permanent loan
closing (or as otherwise specified in Chapter 14 for Tax Credit projects), or converted in whole or in
part to Secondary Financing within the allowed limits for the FHA program. Bridge loan or other debt
intended to increase the FHA-insured mortgage or circumvent outstanding program requirements will
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not be recognized as existing indebtedness in the cost basis. Gap financing is a loan that may be
secured by a subordinate lien behind the permanent first mortgage to provide additional capital funds
for the project; it must meet the Guide’s requirements for secondary financing.
R. Secondary Financing. HUD insured mortgages must be first liens. Secondary liens are permitted in
the case of HUD insured second mortgages (supplemental loans and operating loss loans) and under
certain conditions. Chapter 8 contains the requirements for secondary financing.
S. Tax Increment Financing. Tax Increment Financing or TIF, is a public financing method that is
used as a subsidy for redevelopment, infrastructure, and other community-improvement projects.
States create districts to administer the program for communities to benefit from the TIF. TIF
structures vary by municipality, state, or local authority. They may use future gains in taxes (i.e. tax
assessments) to subsidize current improvements. Some States sell bonds backed by a project
development's future taxes, while the bond money helps pay the developer's construction costs.
TIF may or may not be recognized as a source of funds, equity, additional income, or a loan in FHAinsured underwriting. The MAP Lender must:
1. Disclose a proposed or existing TIF Commitment at the Concept Meeting;
2. Determine the amount and terms of the TIF and whether or not the specific work in the TIF
Commitment is included in the improvements for FHA-insured mortgage; and
3. Document that none of the TIF proceeds are used to support FHA-insured mortgage proceeds, or
provide complete analysis and documentation demonstrating that the TIF funds and any tax
benefits are irrevocably committed.
T. Commercial Space. Commercial facilities may be included in a mixed use project, subject to
programmatic space and income limitations. See Chapter 7, Chapter 14.14, and Appendix 3A for
further guidance.
U. Military Impacted Areas. HUD generally will not insure mortgages in designated military impacted
areas unless HUD determines that demand from nonmilitary households is sufficient to sustain
occupancy in both the insured project and the market as a whole. Section 238(c) of the National
Housing Act authorizes the provision of insurance in military impacted areas upon certain findings by
the Department of Defense (DOD) and HUD HQ. In such areas, borrowers should be encouraged to
contact DOD for other potential programs administered by DOD which could provide alternative
sources of financing for the proposed project. Section 238(c) loans are not eligible for MAP but may
be processed under TAP.
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V. Student Housing. Insured projects cannot be designed solely for student occupancy, although students
and families are eligible occupants of insured family housing projects. Insured loans on projects in
college areas must be underwritten at rents that are comparable to family housing in the area. Loans
cannot be underwritten with rental rates assuming multiple student occupants in a unit that would
result in a processing rent higher than a typical family apartment.
W. Real Estate Requirements. The insured mortgage must be on real estate:
1. Held in fee simple, or
2. Under a lease with a term of at least (i) ninety-nine years which is renewable, (ii) 50 years from the
date the mortgage is executed, or (iii) for a period of not less than 10 years more than the loan maturity
date, dependent upon the SOA.
X. Transient Housing/Hotel Services Prohibition. Section 513 of the National Housing Act prohibits
the use of the insurance programs for transient or hotel purposes. Leases for less than 30 days are
prohibited and occupants cannot be provided with hotel services such as maid service, furnishing and
laundering of linens, room service and bellboys. This also applies to any commercial space funded by
the mortgage.
Y. Operating Deficit. An operating deficit escrow is required on all applications for new construction
and substantial rehabilitation to provide funding for operating expenses and debt service when net
income is not available during the initial lease up and stabilization period. A debt service escrow may
also be required on Section 223(f) proposals where analysis requires it. This escrow is not
mortgageable and unused portions will be returned to the borrower. See Chapters 7.14 and 8.14 for
more detail.
Z. Short-Term Lease Premiums. Projects offering leases with terms of less than 30 days are not eligible
for HUD-insured financing under any circumstances. Treatment of income from other short-term
leases, e.g., furnished units, corporate or business short-term leases, may be considered to the extent
that it is present in the local market for periods greater than 30 days. The actual number of furnished
or corporate/business units generally may not exceed 10% of the units and must be approved by Asset
Management at the time of underwriting. See Chapter 7 (Section 7.7.M) for short-term lease
underwriting and valuation instructions, and other requirements.
AA. Replacement Reserve. An Initial Deposit to the Replacement Reserve is funded at closing and
monthly deposits are subsequently made from project operating income to pay for the eventual
replacement of short-lived or capitalized physical assets. See Section 7.8 for the minimum annual
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replacement reserve requirements for all program types and Appendix 5G for guidance on completing
a Capital Needs Assessment (CNA) for all insured projects every 10 years. Handbook 4350.4, Chapter
2 Servicing Manual, details the lender’s responsibility for managing funds held for the project and
describes the liquidity, draws and investment requirements.
BB. Developer Fees. In Cost Controlled mortgages for FHA New Construction and Substantial
Rehabilitation Programs (other than Section 231 Substantial Rehabilitation and Section 241(a)),
Builder Sponsor Profit and Risk Allowance (BSPRA, or SPRA) is allowed. BSPRA is a mortgageable
cost but not a source of cash. For affordable programs (such as Low Income Housing Tax Credits,
RAD, and Section 202 refinancings), a Developer Fee may be mortgageable as long as BSPRA or
SPRA is not also included. A summary of Developer Fee calculations limits for various FHA and
assisted programs is included in Appendix 3B.
CC. Scattered Sites. FHA insured multifamily properties may be traditional multifamily structures on one
site, or may be detached, semi-detached, or row houses. Each property must consist of five or more
dwelling units. Group homes are not eligible.
The site may consist of two or more noncontiguous parcels of land when the parcels comprise one
marketable, manageable real estate entity and each parcel (or combination of contiguous parcels) has
at least 5 units. (The regulations, 24 CFR 200.73(c), prohibit sites with less than 5 units.).
The following factors should be considered in underwriting, and determining whether a scattered site
property is one marketable, manageable real estate entity:
1. Distance. Generally a greater distance would be acceptable in a rural area than an urban one, but
we should never be seeing two projects funded by one FHA insured multifamily mortgage greater
than 15 or 20 miles away from each other.
2. Physical condition, construction type, and age. If individual sites vary in these criteria, it is more
difficult to make the case they comprise a single entity, and to evaluate the collateral (e.g.
requiring separate CNA and Appraisal analyses, which are then combined. If they can’t analyze it
with one CNA and one Appraisal, it is not one real estate entity.
3. Occupancy type and turnover history.
4. Unit configuration and project layouts.
5. Expense volatility, particularly for single family structures or more widely disbursed properties.
Risk in such cases must be mitigated by high-end expense estimates, and in some cases shorter
amortization periods.
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DD. Condominiums. A project built and platted as condominiums, but now operating as a rental project,
may be refinanced under Section 223(f) if the condominium regime is held by a single owner with no
individual unit ownership and the property meets other program guidelines, including the minimum
occupancy standards. Condominium regimes are similarly permitted under new construction and
substantial rehabilitation proposals that meet these same requirements.
Condominium ownership regimes may be recorded if the property is otherwise operated as a rental
project with a single ownership entity owning all the apartments. Separate condominium units may be
established for commercial use and for housing use which must include all the residential apartments.
The insured loan must be secured by a mortgage on the rental apartments and mortgageable
commercial space. Joint use and maintenance agreements and easements between the insured portion
and any separately demised condominium portion must be defined, and all condominium fees must be
equitably allocated.
The Regional Center or Satellite Office Director may consider a waiver for a condominium building
with a limited number of individually owned units (i.e., 10% or less of total units) if all such units are
located in a separate building or in a separate section of a single building apart from the rental units.
HUD will not consider a waiver if any ownership units are interspersed with the rental units.
EE. Environmental Review. HUD has responsibilities to comply with various environmental laws and
regulations. Lenders’ submission requirements assist in this review, as detailed in Chapter 9,
Environmental Review.
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FF. Underwritten Occupancy. Underwritten vacancy and collection loss rates will be the lesser of the
minimum levels shown below and actual levels. The MAP Lender’s third party Appraiser should use
actual vacancy rates, generally expected to be no lower than the rates below. The minimum vacancy
rates allowed for underwriting and sizing mortgages determined with debt service calculations are as
follows:
Minimum
Vacancy
and
Collection
Loss Rate
3%
5%
7%
Property Type
•
•
Properties with HAP contracts covering 90% or more of the units; or
In-place rehab with:
o Occupancy at or above 90%, and
o 90% or more of the units set aside as LIHTC units, and
o Attainable Tax Credit rents at least 10% below market (i.e.
“a 10% discount to market”).
•
Properties with 80% or more of the units set aside as LIHTC units,
and
Attainable tax credit rents at a 10% discount to market.
•
•
•
LIHTC properties with any percentage of units set aside but without a
10% discount to market; or
Properties in which 20% or more of the units are Market Rate.
GG. All certifications submitted by the Lender in support of MAP applications should contain the
following language:
I hereby certify under penalty of perjury that all of the information I have provided on
this form and in any accompanying documentation is true and accurate. I acknowledge
that if I knowingly have made any false, fictitious, or fraudulent statement,
representation, or certification on this form or on any accompanying documents, I may
be subject to criminal, civil, and/or administrative sanctions, including fines, penalties,
and/or imprisonment under applicable federal law, including but not limited to 12
U.S.C. § 1833a; 18 U.S.C. §§1001, 1006, 1010, 1012, and 1014; 12 U.S.C. §1708 and
1735f-14; and 31 U.S.C. §§3729 and 3802.”
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HH. Waivers. There are various references in the MAP Guide to HUD’s waiver authority. Regulatory
Waivers must be approved at the Assistant Secretary level, and certain waivers are reserved to
HUD Headquarters. Regional Center Directors retain waiver authority for other provisions of the
MAP Guide. While HUD may consider waiver requests within delegated authority, they will not
be approved except for good cause, and Lenders should not assume approval.
3.2 New Construction/Substantial Rehabilitation Program Requirements
Sections 220, 221(d)(4), 231 and 241(a) of the National Housing Act provide FHA multifamily mortgage
insurance for the new construction or substantial rehabilitation of multifamily rental apartment properties.
Section 213 is available for the new construction or substantial rehabilitation of Cooperatives, however
those transactions will be processed under Traditional Application Processing (TAP).
The following requirements apply to all FHA New Construction/Substantial Rehabilitation multifamily
mortgage insurance programs:
A. Properties must have 5 or more residential units with complete kitchens and baths. (Section 231
requires at least 8 units.) Group Homes are not eligible for FHA multifamily mortgage insurance.
SRO properties will only be considered if they have existing Project based Section 8 contracts in
place.
B. HUD can insure both the construction and permanent loan periods (Insurance of Advances) or just the
permanent loan period (Insurance Upon Completion). Davis-Bacon wage requirements apply to new
construction and substantial rehabilitation transactions for both Insurance of Advances and Insurance
Upon Completion.
C. New Construction transactions finance improvements where no construction work has been done to the
site prior to Initial Endorsement. See Chapter 5 for additional information and exceptions.
D. Substantial Rehabilitation transactions finance repairs and rehabilitation of existing properties that are
or have been previously occupied. Projects in which construction of above ground improvements was
started but not completed or inhabited are not eligible. The definition of substantial rehabilitation is
based on either a per unit threshold for the cost of rehabilitation, or substantial replacement of two
major systems. See Chapter 5.
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E. Cost Certification. The borrower must submit a cost certification prepared by an independent CPA upon
completion of construction or substantial rehabilitation. The mortgage amount that is finally endorsed for
insurance after completion of construction can be reduced based upon HUD review of the cost certified
amounts. General contractors or subcontractors are required to submit a cost certification if there is an
identity of interest with the borrower. See Chapter 14 for Tax Credit project cost certification procedures
and exemptions.
F. Federal Labor Standards. The general contractor and all subcontractors for FHA-insured new
construction or substantial rehabilitation transactions are required to comply with federal wage and
reporting requirements under the Davis-Bacon Wage Act. Davis-Bacon requires the payment of
prevailing wage rates and the submission of weekly certified payroll reports. Prevailing wage
schedules may be obtained from the Regional Center or Satellite Office. There are limited exceptions
to this requirement. Davis-Bacon Wage requirements do not apply for Section 241(a) in which the
underlying first mortgage is a Section 223(f) loan that was not subject to Davis-Bacon requirements
(or a Section 223(a)(7) loan) or for Section 241(a) loans for projects with a Secretary-held mortgage if
the project did not originally have an FHA-insured loan that was subject to Davis-Bacon.
G. Assurance of Completion. The general contractor shall provide an assurance of completion of
construction on forms approved by HUD. See Section 8.14 for the specific requirements.
H. Absorption Period. The absorption period used in estimating market demand for proposed newly
constructed or substantially rehabilitated units is 18 months. Larger projects may phase in additional
units under a separate application for mortgage insurance. An exception to the 18 month limitation on
the absorption period may be considered by the Regional Center or Satellite Office Director for large
high rise buildings which will be evaluated based on their own merit and will require a larger initial
operating deposit.
I. Marketing, Leasing and (if applicable) Relocation Plan. All projects that require absorption of
units at economic rents to achieve break-even occupancy must submit a detailed marketing and leasing
plan, and a budget reviewed and confirmed by the proposed property management company. The plan
must discuss when marketing efforts will begin, when the leasing office and model units will open,
how the leasing office will be staffed, and the project’s marketing and advertising strategy. The plan
must address timing of the construction progress schedule with respect to egress and ingress into the
project, landscaping and access to amenities. These items are in addition to those required by the
Affirmative Fair Housing Marketing Plan. For substantial rehabilitation projects involving temporary
relocation or displacement of residents, the marketing, leasing and relocation plan must address details
of timing, funding and management of the relocation process.
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Program Requirements
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Document page 69
The relocation plan must be consistent with the applicable HUD program related regulations
concerning displacement, relocation and acquisition, in addition to the requirements of the Uniform
Relocation Assistance and Real Property Policies Act of 1970 (URA) and Section 104(d) of the
Housing and Community Development Act of 1974 (section 104(d)) to the extent those laws and
implementing regulations are applicable to the undertaking.
The URA may apply to an undertaking if a property will be receiving Project Based Section 8
assistance or other federal financial assistance in connection with related acquisition, rehabilitation
(repairs) or demolition activities. Section 104(d) may apply when a lower-income dwelling is
demolished or converted to a use other than lower-income housing in connection with a Community
Development Block Grant Program (CDBG) or HOME Investment Partnership Program (HOME)
funded activity. See Appendix 3E for additional information about these requirements.
In addition to any applicable requirements associated with permanent tenant displacement, the URA
and applicable HUD program regulatory requirements may also require compliance for temporary
relocation of tenants caused by the project. Generally, when there is temporary relocation in covered
projects, persons must be reimbursed for all reasonable increased out of pocket expenses in connection
with their temporary relocation including but not limited to moving expenses and increased housing
costs. Project owners should consult, and the Lenders application should ensure compliance with, any
and all applicable temporary relocation requirements. See Appendix 3E for additional information
about these requirements.
Federal insurance, including FHA mortgage insurance, is excluded from the definition of Federal
financial assistance under the URA and, therefore, does not trigger URA requirements on its own.
Underwriters must however evaluate and mitigate the risk of impact of relocation, and to the extent
reasonably possible, FHA mortgage insurance applications should minimize any negative impact
during or after the rehabilitation period on existing residents. Generally, a relocation plan should
include the following elements:
•
•
•
•
•
•
Accurate data, dates and dollars.
Who is responsible – the individuals, their names, contact information and roles provided?
Requires a designated Relocation Liaison with right skill set – not the Property Manager,
not the Contractor. Liaison needs to attend site meetings.
Which residents are moving in which specific units?
When. A relocation schedule with specific dates for each unit, sequenced and coordinated
with the construction schedule.
How will effective communication be done, how and who is responsible for packing,
moving, inspections (in and out), dealing with residents’ special needs or complaints, etc.
An accurate cost of relocation so that the relocation escrow is correct.
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J. Working Capital Escrow. The Working Capital Escrow is designed to cover accruals of taxes,
insurance, and interest above the amounts capitalized in the mortgage in the case of construction delay.
The escrow may also be used to pay for construction contingencies for cost overruns and change
orders, and other miscellaneous expenses which are not included in the mortgage, and required for
new construction and substantial rehabilitation proposals. See Section 8.13 for general requirements
and Section 12.15.C for working capital escrow release instructions.
K. Furniture, Fixture and Equipment (FF&E) in Cost Basis. Reasonable costs of Furniture, Fixture
and Equipment may be included in mortgageable project costs and in the Reserves for Replacement
for new construction and substantial rehabilitation proposals. See Chapter 5, Section 5.11.D.4.i for
FF&E examples and guidance. All funded FF&E will be subject to HUD’s security instruments.
L. Elderly Developments. New construction or substantial rehabilitation of apartments specifically
designed with occupancy restricted to the elderly age 62 and over should be processed under Section
231. Age restricted projects are not eligible under Section 220. Age restricted Multifamily projects
may be considered under other Sections of the Act (e.g., Section 221(d)(4) or 223(f)) so long as they
comply with the provisions of Section 3.1.O.
M. Occupancy Preference. Sponsoring nonprofit organizations such as labor unions, professional
groups, religious organizations, and fraternal or civic organizations, may give preference to their
members, provided membership in the organization is open without regard to race, color, national
origin, sex, sexual orientation, gender identity, marital status, age, disability or religion. However,
sponsors cannot restrict occupancy solely to their members. Preferences may also be given to other
groups such as veterans, homeless persons, victims of domestic violence, etc.
Residency preferences may only be used under conditions specified in the Affirmative Fair Housing
Marketing Plan instructions and 24 CFR 5.655( c)(1), so that they may not create a disparate impact in
selection against protected classes. In no case may special preference be given to children of current
residents since the demographics of housing markets and labor pools change. Similarly, projects
(regardless of ownership) may target occupancy to various demographic groups (such as “workforce
housing”) so long as there is sufficient and sustainable market and Affirmative Fair Housing
Marketing Plans and other management plan exhibits demonstrate the property will not discriminate
against any particular race, color, nationality/ethnicity, religion, sex, disability, familial status
(children of all ages and pregnant women), sexual orientation and gender identity and age.
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N. Builder and Sponsor’s Profit and Risk Allowance (BSPRA) and Sponsor’s Profit and Risk
Allowance (SPRA) are allowed (but not required) for new construction and substantial rehabilitation
applications under Sections 221(d)(4), 220, and 231 for profit motivated and limited distribution
borrowers. Non-profit borrowers are eligible for a developer’s fee, or they may apply as a for-profit
entity for purposes of applying for FHA mortgage insurance, as provided in Chapter 8.
1. The BSPRA allowance will be credited against the borrower’s required equity contribution.
To use BSPRA, there must be an identity of interest between the borrower and general
contractor and there must be no paid builder’s profit contained in the mortgage calculation.
For new construction, BSPRA is 10% of the estimated cost of: on site improvements,
structures, general requirements, general overhead, architect's fees, carrying charges and
financing, legal, organizational and audit expenses (total of lines 50, 63 and 67 in Section G. of
Form HUD-92264), exclusive of land. For substantial rehabilitation projects, BSPRA is 10%
of the above costs exclusive of the as is value of the existing structure.
2. SPRA may be included in replacement cost where no identity of interest exists between the
general contractor and borrower, or where there is an Identity of Interest but the borrower and
general contractor have agreed a general contractor profit instead of BSPRA. SPRA is 10% of
the total estimated cost of: architect's fees, carrying and financing charges, legal,
organizational, and audit expenses.
O.
Energy Efficiency. New construction projects must comply with the International Energy
Conservation Code (IECC) 2009 for buildings up to three stories, or in the case of buildings over three
stories, American Society of Heating, Refrigeration and Air-conditioning Engineers, ASHRAE
Standard 90.1 2007 edition (or such later versions as may be adopted by the Secretary of HUD),
pursuant to the requirements of the Energy Independence and Security Act of 2007(Public Law 110140). “Gut” rehabilitation projects must conform to these energy codes except where compliance
cannot be obtained due to required preservation of historic buildings or elements of historic buildings.
When a CNA for existing buildings includes an energy audit meeting the requirements of ASHRAE
level II, and when the CNA describes potential future savings if recommended energy efficiency
measures are adopted, up to 75% of projected energy savings may be recognized.
P. Cost vs. Value. Most FHA multifamily new construction and substantial rehabilitation programs are
based on cost rather than value when sizing the mortgages (in Criterion 3 of Form HUD-92264A).
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Section 221(d)(4) Mortgage Insurance for
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Exceptions are Sections 231 and 241(a) programs, which have value limitations. For substantial
rehabilitation under all Sections of the Act, the “as is” value of the project is a component of the cost.
“As is” value of a substantial rehabilitation project will be the lessor of the value “as is”, reflecting
actual occupancy and any restrictions on NOI, or the purchase price at closing if it is an arms-length
acquisition transaction.
3.3
Section 221(d)(4) Mortgage Insurance for Rental and Cooperative
Housing - New Construction and Substantial Rehabilitation
Section 221(d)(4) insures mortgages for the new construction or substantial rehabilitation of rental
housing. In addition to the general requirements in Sections 3.1 and 3.2, the requirements in this section
apply to the Section 221(d)(4) program:
Maximum Loan Ratios and Debt Service Coverage Ratios. The following loan ratios and percentages
control the loan amount and are the mortgage criteria detailed on the Form HUD-92264-A, Supplement to
Project Analysis. The lowest of the mortgage criterion controls the loan amount.
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Section 221(d)(4) Mortgage Insurance for
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Document page 73
Chapter Index / Section Index
Section 221(d)(4)
New Construction and Substantial Rehabilitation
Criterion 1:
Loan Amount Requested in the Application. The requested application amount may be amended when
appropriate, e.g. when a higher mortgage is supportable due to a drop in rates.
Criterion 3:
Amount Based on Replacement Cost: The applicable percentage of the estimated replacement cost for
new construction or the applicable percentage of the sum of the estimated replacement cost for substantial
rehabilitation plus the “as is” value of the property before substantial rehabilitation is:
a.
90% - for projects with 90% or greater rental assistance;
b.
87% - for projects that meet the definition of Affordable Housing; or
c.
85% - for market rate projects
Criterion 4:
Amount Based on Limitations per Family Unit: Where percentages are required, enter the same
percentage applied under Criterion 3. See Chapter 8 for complete details and the MF Housing website:
http://www.hud.gov/offices/hsg/mfh/hicost/hicost.cfm on information for per family unit limitations and
the High Cost Percentage by jurisdiction.
Criterion 5:
Amount Based on Debt Service Ratio (DCR) (ratios are rounded for presentation purposes):
a.
90% (1.11 DCR) – for projects with 90% or greater rental assistance;
b.
87% (1.15 DCR) – for projects that meet the definition of Affordable Housing; or
c.
85% (1.176 DCR) - for market rate projects
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Chapter Title:
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3.4
Section 220 Mortgage Insurance for Rental
Housing for Urban Renewal and Concentrated
Development Areas – New Construction and Substantial
Rehabilitation
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3.4
Document page 74
Chapter Index / Section Index
Section 220 Mortgage Insurance for Rental Housing for Urban
Renewal and Concentrated Development Areas – New
Construction and Substantial Rehabilitation
Section 220 insures mortgages for the new construction or substantial rehabilitation of mixed use housing
projects in urban renewal areas, code enforcement areas and other areas where local governments have
undertaken designated revitalization activities.
In addition to the general requirements in Sections 3.1 and 3.2, the following requirements apply to
Section 220:
A. Eligible Areas. The property must be located in either a concentrated development area approved by
the Multifamily Regional Center or Satellite Office, or one of the following:
1. Existing slum clearance and urban redevelopment projects covered by a Federal aid contract before
the effective date of the Housing Act of 1954.
2. An approved urban renewal area under Title I of the Housing Act of 1949.
3. Disaster urban renewal projects assisted under Section III of the Housing Act of 1949 as amended.
4. An area of concentrated code enforcement being carried out under Section 117 of the Housing Act
of 1949.
The Multifamily Regional Center or Satellite Office will consider proposals in concentrated
development areas in which concentrated housing, physical development and public service activities
are being carried out in a coordinated manner, pursuant to a locally developed strategy for
neighborhood improvement, conservation or preservation. Locally developed strategies may be
informal, but must:
a. Provide for a combination of physical improvements, necessary public facilities and services,
housing programs, private investment and citizen self-help activities appropriate to the needs of
the area,
b. Coordinate public and private development efforts, and
c. Provide sufficient resources to produce substantial long-term improvements in the area within
a reasonable amount of time, taking into account the severity of the area’s problems.
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Section 231 Mortgage Insurance for Rental
Housing for Elderly Persons – New Construction and
Substantial Rehabilitation
Document page 75
Chapter Index / Section Index
B. Commercial Facilities. Commercial space may be included if it will serve the needs of the project
residents and other residents of the area. Commercial space is limited to 25% of total net rentable area
and commercial income to 30% of effective gross project income.
See Section 7.7 and Section 7.8 for requirements where commercial facilities are included in a project.
C. Maximum Loan Ratios and DCRs. The controlling mortgage criteria for Section 220 loans are the
same as for the Section 221(d)(4) program, detailed above.
D. Builder/Sponsor Profit and Risk Allowance (BSPRA). See definition of BSPRA in Section 3.2.N.
E. Sponsor Profit and Risk Allowance (SPRA). See definition of SPRA in Section 3.2.N.
F. Elderly Developments. Apartments specifically designed for the elderly, limited to elderly occupancy,
and/or seeking to use the Fair Housing Act’s housing for older persons exemption are not permitted
under Section 220.
3.5
Section 231 Mortgage Insurance for Rental Housing for Elderly
Persons – New Construction and Substantial Rehabilitation
Section 231 insures mortgages for construction and substantial rehabilitation of rental housing for elderly
persons (aged 62 or older) and/or persons with disabilities. A project must comprise 8 or more new or
substantially rehabilitated units designed for occupancy by elderly persons and may include family units
for occupancy for persons who qualify as handicapped.
A. Definitions/Explanations of Terms:
1. Elderly Person. A person aged 62 or older. For Section 231 occupancy, other than for units
designed for the use and occupancy of handicapped persons and their families for up to 25% of the
units, all persons living in a unit must be age 62 or over.
2. Handicapped [“disabled”] Person. A person who has a physical impairment which:
(1)
Is expected to be of a long-continued and indefinite duration;
(2)
May substantially impede his/her ability to live independently; and
(3)
Is of such a nature that his/her ability to live independently could be improved by
more suitable housing conditions.
B. Room Lay Out, Design and Special Amenities. Particular attention is to be given to room lay out and
unit design to assure they are consistent with the needs of the elderly or handicapped market.
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C. BSPRA or SPRA allowances are eligible under Section 231 new construction transactions so long as
there is no Developer Fee. These allowances are not available for Section 231 substantial
rehabilitation transactions, which may be constrained by value. See Section 3.42.N. for an explanation
of these allowances.
D. Maximum Loan Ratios and DCRs. The controlling mortgage criteria for Section 231 loans are the
same as for the Section 221(d)(4) program, detailed above, with the exception of criterion 3 for
substantial rehabilitation loans, which is controlled by the applicable percentage of “as rehabilitated”
value (not cost).
3.6
Section 241(a) Mortgage Insurance for Supplemental Loans for
Multifamily Projects
A. Eligibility. Section 241(a) is now a MAP-eligible program. It provides secondary financing for
improvements or additions to properties with a HUD-insured first mortgage which need repairs,
substantial rehabilitation, or additional units.
1. Projects with HUD held debt (as opposed to FHA-insured), or Risk Share financing are not eligible
to apply for Section 241(a) loans.
2.
Improvements, such as fire safety improvements, energy conservation measures, updated security
systems, or substantial rehabilitation may be financed with a Supplemental Loan. As a general
rule, repairs to an existing project that are not extensive enough to be classified as substantial
rehabilitation should be paid for by funds other than a Supplemental Loan. However, if there are
major repairs required and other funds are not available in the replacement reserve, the sponsor
may seek a Supplemental Loan under Section 241(a).
3. Construction of additional units, or expansion of the foot print of the existing building, is allowed.
Such work may be completed on the existing parcel secured by the first mortgage, or a contiguous
or nearby parcel acquired and included in an amendment to the existing first mortgage security
documents.
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4. A cross-default provision should be placed in the Section 241(a) mortgage loan documents such
that a default under a “prior recorded insured mortgage” will trigger a default under the Section
241(a) mortgage. Conversely, a default under the Section 241(a) loan should not trigger a default
under the first mortgage.
B. Term. The Section 241(a) loan should generally be coterminous with the underlying FHA-insured first
mortgage if that loan has more than 25 years remaining on its term. If less than 25 years remain on the
term of the first mortgage, HUD will consider an amortization period up to 40 years regardless of the
underlying first mortgage’s amortization period so long as the term is no greater than 75% of the
project’s remaining useful life.
C. Equity requirement and controlling mortgage criteria. The owner is required to contribute at least 10%
of the total development cost of the transaction. Existing reserve for replacement deposits in excess of
the Initial Deposit requirement concluded in the CNA and underwriting may be used to meet the
equity requirement. Similarly, land equity from adjacent or nearby parcels added and incorporated into
the existing first mortgage security and additional cash contributions can be used to meet the 10%
equity contribution requirement. Residual Receipt account funds (e.g., from surplus Section 8 funding)
cannot be used to meet equity requirements. Imputed equity representing the difference between the
“as is” value of the project and the existing indebtedness is not available to meet the equity
requirements. The HUD Form 92264 and 92264A should recognize only the cost of the addition or
improvements but, should include all (i.e. the existing and proposed) project Net Operating Income
(NOI) in Criterion 5 of Form HUD 92264A. A supplemental analysis comparing the historical and
proposed NOI should be included as an attachment to the HUD-92264.
Criterion 3: Loan to Value / Cost.
A Section 241(a) supplemental loan is limited by statute to 90% of the HUD-estimated value of
the improvements, additions or equipment, regardless of the Section of the Act insuring the
underlying first mortgage. The cost of the repairs and transaction costs (including the acquisition
price of an adjacent or nearby land parcel) will be recognized as the value, so long as any
additional land purchased or contributed is no more than the fair market value. Regardless of the
Section of the Act of the underlying first mortgage, neither BSPRA nor SPRA may be
recognized. The cost of the transaction can and should include builder’s profit (regardless of
whether there is an Identity of interest.)
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Section 207/223(f) Mortgage Insurance for
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Criterion 4: Statutory Limits.
The Supplemental Loan, when added to the outstanding balance of the mortgage covering the
project or facility, may not exceed the maximum statutory limitation applicable to the building
and unit type for the Section of the Act under which the existing first mortgage is insured.
Criterion 5: Debt Service Coverage Ratio.
The maximum loan amount under this criterion is debt service (in combination with the first
mortgage payments) supported by 90% of projected NOI.
D. CNA, Plans and Specifications, and Cost Estimate requirements. A complete CNA, including reserve
for replacement analysis, is required for all Section 241(a) loans. The repair list should be
supplemented with Plans, Specifications, and Cost analysis per requirements for Section 221(d)(4) or
other new construction or substantial rehabilitation loan programs.
E. Davis-Bacon Act applicability. Davis-Bacon Wage requirements apply for all Section 241(a) loans
except (i) those in which the underlying first mortgage is a Section 223(f) loan that was not subject to
Davis-Bacon requirements (or a Section 223(a)(7) loan), and (ii) those for projects with a Secretaryheld mortgage if the project did not originally have an FHA-insured loan that was subject to DavisBacon.
F. Insurance of Advances or Insurance upon Completion. Either approach is acceptable. Construction
advances for any Supplemental Loan may be insured; the minimum amount of advance that may be
insured is $200,000. Mortgageable contingency and construction draw retainage are subject to the
same requirements as other New Construction / Substantial Rehabilitation programs.
G. Environmental Assessments. An environmental assessment per Chapter 9 is required for Section
241(a) loans used to fund significant improvements, additional units or an increase in a building
footprint.
H. Working Capital and Operating Deficit Reserves. The working capital and operating deficit reserves
requirements are the same as those of the Section 221(d)(4) program. The lender can recommend, and
HUD may approve, waiving the requirements when appropriate on specific cases. A default under the
first mortgage will constitute a default under the Section 241(a) loan.
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Section 207/223(f) Mortgage Insurance for
Purchase or Refinancing of Existing Multifamily Rental
Housing
Chapter Index / Section Index
Document page 79
Section 207/223(f) Mortgage Insurance for Purchase
Refinancing of Existing Multifamily Rental Housing
or
Section 207/223(f) insures mortgages for the purchase or refinancing of existing rental housing which may
have been financed originally with conventional mortgages or equity. The use of Section 223(f) for
Cooperative Multifamily Housing is described in Chapter 17. Properties requiring substantial
rehabilitation are not eligible for this program. HUD requires completion of critical repairs before
endorsement of the mortgage and permits the completion of non-critical repairs after endorsement.
A.
Eligible Properties. The property must contain at least 5 residential units. Properties must have been
completed or substantially rehabilitated at least 3 years before the date of application.
Properties that were constructed or substantially rehabilitated with HUD-insured multifamily
mortgages, and the latent defects guarantee period has expired, are exempt from the 3-year rule.
Projects with additions completed less than 3 years before the application are eligible for refinancing
as long as the size and number of units in the addition are not larger than the size and number of units
in the original project.
B.
Ineligible properties.
1. Manufactured home parks, Section 202 or 811 projects funded after 1990 by Capital Advances
and/or Project Rental Assistance Contracts (PRACs) and group homes are not eligible under this
Section.
2. Properties whose required repairs are so extensive that they meet the threshold for substantial
rehabilitation are not eligible under this Section.
3. Properties with meal services or other features typical of or unique to Retirement Service Centers.
Although, there is a potential exception to allow otherwise prohibited services for refinancing
Section 202 properties or HUD-insured properties with Project-Based rental assistance so long as
they are offered on an optional basis, projects with mandatory meal service are not eligible.
C. In addition to the general requirements in Section 3.1, the following requirements apply to Section
223(f) when used for acquisition or refinancing:
1) Any property acquired by the borrower before the date of the mortgage insurance application shall
be treated as a refinance transaction;
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2) Any property acquired the borrower after the date of the mortgage insurance application shall be
treated as a purchase; and
3) In a purchase transaction, any identity of interest, however minor an interest, between seller and
purchaser requires the application to be processed as a refinance. (Acquisitions to facilitate Low
Income Housing Tax Credit transactions are an exception to this requirement.)
D. Repairs.
1. Critical repairs must be performed prior to endorsement.
2. Non-critical repairs, approved by HUD, may be completed after endorsement with work write-ups
sufficiently detailed to facilitate inspections, schedules for completion of repairs, complete bids on
work items greater than $25,000, and a financial escrow equal to 120% of the non-critical repair
costs that must be established at closing. The 20% escrow above the 100% of the non-critical
repair cost is non-mortgageable and may be reduced to 10% for affordable transactions.
E. Fair Housing Act Noncompliance. Any property available for first occupancy after March 13, 1991,
that is in noncompliance with Fair Housing Act design and construction requirements, must, as a
condition of insurance, be modified/retrofitted to comply with Fair Housing Act accessibility
guidelines. HUD may approve the modifications/retrofits to be completed after endorsement with
appropriate financial escrows at closing, and the work must be performed in accordance with
instructions in Section 5B “Accessibility for Persons with Disabilities.”
F. Elderly or Age Restricted developments. Projects with existing elderly occupancy or age restrictions
are eligible for refinancing under Section 223(f) as long as the property meets the requirements of
Section 3.1.O and does not contain the features of the Section 232 program.
G. Prior Defaults/Claims or Departmental Enforcement Center Referrals. HUD does not prohibit
applications for mortgage insurance for formerly HUD-held loans but will not accept any application
from a borrower/principal who has had a previous loan or other financial relationship with HUD and
not proven to be a good business partner, or for a property which has proven to be unsuccessful in the
past. The lender should accept such applications only after they have documented the economic,
physical, operational or management changes that have occurred which would justify an application
for new insurance. A concept meeting prior to submission is required to address the past experience of
the loan and of the borrower/principal including past Regulatory Agreement compliance. Similarly,
the lender should ensure that the borrower, the proposed management agent, and/or the Project have
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Housing
Chapter Index / Section Index
Document page 81
not been referred to HUD’s Departmental Enforcement Center (DEC), or if such a referral has been
made, that all issues have been or will be resolved.
H. Labor standards. Davis-Bacon prevailing wage requirements do not apply to Section 207/223(f).
I. Prepayment Provisions and Prohibition. The National Housing Act prohibits prepayment of loans
insured under Section 223(f) for 5 years from the date of endorsement for insurance except where at
the time of prepayment:
1. The borrower enters into an agreement with HUD to maintain the property as rental housing for the
remainder of the specified 5 year term;
2. HUD determines that the conversion of the property to a cooperative or condominium ownership is
sponsored by a bona fide resident organization representing the majority of households in the
project;
3. HUD determines that continuation of the property as rental housing is unnecessary to assure
adequate rental housing for low and moderate income residents of the community; or
4. HUD determines that continuation of the property as rental housing would have an undesirable and
deleterious effect on the community.
The statutorily imposed prepayment restriction is not intended to prohibit refinancing under Section
223(a)(7) though the terms of a Ginnie Mae or other mortgage backed security or bond financing may
restrict prepayment. A Section 223(f) Use Agreement is required for a refinancing of an existing
Section 207 insured loan pursuant to Section 223(f)/ 223(a)(7) if the mortgage is aged less than five
years from the Final Endorsement date.
J. Eligible Borrowers. Both for-profit and nonprofit Single Asset Mortgagor Entities are eligible to apply.
Tenants-in-common, Delaware Statutory Trusts, and natural persons are not eligible single asset
mortgagor entities but, can hold “upper-tier” ownership interests.
K. Maximum Loan Ratios and Debt Service Coverage Ratios. The following loan ratios and percentages
control the loan amount and are detailed on the Form HUD-92264-A, Supplement to Project Analysis,
mortgage criteria. The lowest of the mortgage criterion controls the loan amount.
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3.7
Section 207/223(f) Mortgage Insurance for
Purchase or Refinancing of Existing Multifamily Rental
Housing
Document page 82
Chapter Index / Section Index
Section 223(f)
Refinance and Acquisition Processing
Criterion 1:
Loan Amount Requested on Application. The requested application amount may be amended
when appropriate.
Criterion 3:
Amount Based on Value: The applicable percentage of the estimated value of the property after
completion of repairs and improvements.
a. 90% - for Section 202 & 202/8 direct loans and for projects with 90% or greater rental
assistance
b. 87% - for projects that meet the definition of Affordable Housing and for which the
achievable Tax Credit rents are at least 10% below market rents; or
c. 85% - for market rate projects or Tax Credit projects without a significant rent
advantage (i.e. the achievable rents are at least 10% below market.)
Criterion 4:
Amount Based on Limitations per Family Unit: Where percentages are required, enter the same
percentage applied under Criterion 3. See Chapter 8 for complete details and the MF Housing
website: http://www.hud.gov/offices/hsg/mfh/hicost/hicost.cfm on information for per family unit
limitations and the High Cost Percentage by jurisdiction.
Criterion 5:
Amount Based on DCR ( ratios are rounded for presentation purposes):
a. 90% of NOI (1.11 DCR) - for Section 202 & 202/8 direct loans and for projects with
90% or greater rental assistance
b. 87% of NOI (1.15 DCR) - for projects that meet the definition of Affordable Housing
and for which the achievable Tax Credit rents are at least 10% below market rents; or
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c. 85% of NOI (1.176 DCR) - for market rate projects or Tax Credit projects without a
significant rent advantage (i.e. the achievable rents are at least 10% below market.)
Criterion 7:
Acquisition Applications
Amount Based on Total Cost of Acquisition Section 223(f). The following percentages apply to
Line 7d. (i.e. formula to compute the loan closing charges) and Line 7h.:
a. 90% - for Section 202 & 202/8 direct loans and for projects with 90% or greater rental
assistance
b. 87% - for projects that meet the definition of Affordable Housing and for which the
achievable Tax Credit rents are at least 10% below market rents; or
c. 85% - for market rate projects or Tax Credit projects without a significant rent advantage
(i.e. the achievable rents are at least 10% below market.)
Criterion 10:
L. The greater of 80% of LTV, or the Cost to Refinance. Cash Out/Equity Out Proceeds. Fifty percent
(50%) of any cash out proceeds after funding mortgageable transaction costs and the assurance of
completion requirements must be held in an escrow by the lender until the required non-critical repairs
are completed and HUD approves the release. (See Chapter 8 for detailed escrow release instructions,
and waiver conditions).
M. Reserve for Replacements. An Initial Deposit and Annual Deposits must be made to the Reserve for
Replacements in accordance with the CNA and underwriting conclusions.
N. Secondary Financing. HUD permits secured secondary financing on Section 223(f) loans up to total
debt of 92.5 Loan-to-Value, or as otherwise specified for affordable housing projects. (See Chapter 8
and chapter 14 for details.)
O. Commercial Space. Commercial space is limited to 25% of total net rentable area and commercial
income to 20% of effective gross project income.
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Chapter Index / Section Index
P. Real Estate Requirements. The mortgage must be on real estate held:
1. In fee simple; or
2. Under a leasehold estate approved by HUD for not less than ninety-nine years which is
renewable or with a minimum term of 50 years from the date the mortgage is executed. Both
the land and the improvements may be subject to the leasehold, so long as OGC determines
there is adequate security for the loan.
Q. Mortgage Term. The maximum term of the mortgage is 35 years or 75% of the remaining economic
life of the property, whichever is less, provided that the term may not be less than 10 years.
R. Firm Commitment Processing Only. Lenders should participate in a concept meeting with the Regional
Center or Satellite Office prior to application submission if there are concerns about marketability,
environment, competing proposals or for particularly complex financing structures or projects with
significant cash out or large loans.
S. Physical Occupancy Standards. Section 223(f) has minimum and maximum physical occupancy
underwriting requirements. See Section 7.7.G for further details.
T. Market Study. Section 223(f) applications typically do not require a market study separate from that
contained in the appraisal. However, in volatile or declining markets, the lender should consider and
may be required to obtain a market study to support the underwriting conclusions of market demand
for the property over the loan term. Regional Center or Satellite Office staff should consult with
Economic Market Analysis Division (EMAD) in such cases. Requirements for market studies are
contained in Chapter 7.
U. Discounts and/or Costs of Issuance associated with bond financing may be eligible for inclusion in the
computation of Criteria 7 and 10.
1. Review documentation regarding permanent financing. Documentation must state the amount of
the discounts, financing fees, and/or costs of issuance to be charged and with whom they will be
paid.
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Document page 85
2. Permanent Placement Fee. This fee must include all permanent placement expenses, including
lender’s legal fees, except discounts. Where Ginnie Mae Mortgage-Backed Securities (MBS) are
involved and the mortgagee charges:
a. The maximum permanent placement fee, it may not assess an additional charge for either the
MBS application fee and/or the securities custodial fee.
b. Less than the maximum permanent placement fee, it may assess an additional charge for either
the MBS application fee and/or the securities custodial fee provided the total fees and charges
do not exceed the dollar value of the maximum permitted permanent placement fee.
3. Determine if the discounts, financing fees and costs of issuance are reasonable and generally in line
with prevailing market conditions and mortgage credit data.
Recognize financing fees and discounts charged by the permanent lender, for inclusion in the
mortgage:
a. Bond fees included in the mortgage transaction:
(1) Where a project is to be financed through the sale of either taxable or tax-exempt bonds,
the maximum financing fees allowable in the mortgage computation and recognizable for
cost certification purposes is 5.5% of the mortgage amount. Any cost beyond the 5.5%
must be paid from sources outside the mortgage.
(2) The maximum financing fee the mortgagee may retain for its own account is 3.5% to cover
the costs of origination, permanent placement, processing, underwriting, closing and
delivery (including the mortgagee's legal fees), escrow monitoring, etc. The remaining 2%
(or such greater percentage as may result from the lender reducing its maximum retained
3.5% fee) may be used to offset the bond fees.
b. Discounts. In a refinancing or purchase transaction, discount fees will be recognized
only for those actual costs charged by the placement lender, which are determined to be
eligible. Discounts included in the computation of Criteria 7 and 10 must be reasonable
based on current market conditions.
V. Defeasance costs associated with underlying bond financing, yield maintenance, swap termination
fees, or costs to satisfy similar derivative instruments will only be recognized in the eligible cost basis
up to 10% of the requested FHA loan amount. Defeasance costs greater than 10% of the proposed
FHA insured loan amount may only be paid from equity-out when the loan amount is less than or
equal to 80% LTV.
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Chapter 3
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Section 223(a)(7) Refinancing of Existing
Insured Mortgages
Document page 86
Section 223(a)(7) Refinancing of Existing Insured Mortgages
The Section 223(a)(7) program is more fully described in Chapter 18 of this Guide. The program was
included as a MAP Program in July 2010, and provides for streamlined refinancing of currently insured
FHA loans. Accordingly, some requirements of MAP processing for other multifamily programs are not
required. The following is a summary of the program features:
Eligibility: Only currently FHA insured loans are eligible. HUD held loans are not eligible unless
subject to a Mark-to-Market Debt Restructuring under MAHRAA. Risk Share loans are not eligible (by
statute). Properties which need substantial repairs or propose new construction (e.g. of additional units or
other permanent structures) are not eligible.
Terms: Most transactions are processed with a lower interest rate, and re-amortized either within the
remaining term or with an extension up to 12 years. Exceptions are detailed in chapter 18. Extended
amortizations may reduce risk to the Department by lowering debt service requirements so long as the
CNA evidences the physical condition supports the extended term of the mortgage. In every case, the loan
term cannot exceed 75% of the remaining useful life of the property.
Controlling Mortgage Criteria: The loan is limited to the lesser of the original principal balance, the
existing indebtedness plus transaction costs, and that which can be supported by 90% of NOI (95% for
projects with greater than 90% Project-Based Rental Assistance).
Lender Fees: Chapter 18 provides more detail. The one exception to the prohibition on inducements is the
payment of pre-payment penalties on an existing FHA insured loan from lender’s profit. The lender may
pay such pre-payment penalties on behalf of the borrower, so long as disclosed to and approved in
advance by HUD. Pre-payment penalties payable by lenders may include the cost of defeasance or
penalties associate with bond financing, or defeasance of other mortgage-backed securities (including
Ginnie Mae securities), so long as the amount does not exceed 10% of the proposed FHA insured loan
amount.
Borrower Fees: Lenders cannot pay application or due diligence fees on behalf of the borrower, or other
payments as an inducement. To do so would be considered a kick-back, and a basis for Enforcement
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Property Insurance Requirements
Document page 87
action. This broad prohibition applies to affiliates of either the lender or the borrower, and includes any
payment or contribution from the lender directly to the borrower or in support of their interests. Other than
to pay for CNA costs, existing Reserve for Replacement deposits (for HUD held or FHA insured
mortgages) are not available for application fees or other transaction costs.
CNA: A complete CNA is required, including intrusive testing for older properties. The format, content,
and scope of a required CNA will not be waived. Given properties applying for Section 223(a)(7) are
already FHA insured, HUD will, in evaluating the CNA, exercise greater flexibility in sizing the reserves
for replacement requirements and timing of repairs, so long as the physical and financial integrity of the
project is ensured, and the owner and management agent are in good standing.
Assuming the project has acceptable REAC scores and HUD Asset Management staff concurs, HUD will
consider waivers for projects which completed construction or a substantial rehabilitation, or had a CNA
done within the last 5 years. In such, cases, a CNA will be required sooner than the normal schedule of
every 10 years.
Other Issues:
Projects in which the repairs or rehabilitation is extensive enough to require an
Environmental Assessment or compliance with Davis-Bacon Wages, are not eligible for Section 223(a)(7)
refinancing.
An officer of the lender who is an approved signator must sign the application. Site visits and an
approved MAP underwriter are generally not required, though the physical condition or other issues in
specific transactions may require such a site visit and underwriter review.
Prepayment approval must be requested by the servicing mortgagee at the time of the application. When
the refinancing is being performed by a different firm than currently services the loan, a letter
accompanying the Firm Commitment application and signed by the borrower to the Servicing lender
notifying them of their intent to refinance and requesting their filing of the HUD form 9807 will be
accepted in lieu of the actual request for prepayment approval.
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Chapter 3
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Property Insurance Requirements
Document page 88
Property Insurance Requirements
A. Insurance During Construction.
1. Public Liability Insurance on a Commercial General Liability form with limits of not less than
$500,000 per occurrence to protect the mortgagor during the construction phase from claims
involving bodily injury and/or death and damage to the property of others. Such Commercial
General Liability Insurance must be endorsed to include owners' and contractors' protective
coverage.
2. Vehicle Liability Insurance with limits of not less than $300,000 for one person and $500,000
for more than one person to protect the mortgagor for claims for bodily injury and/or death,
and not less than $100,000 against claims for damage to property of others arising from the
owner's operation of vehicles. Such insurance must include coverage for employer's owned,
non-owned and/or hired vehicles, where applicable.
3. For properties in a Special Flood Hazard Area on a FEMA Flood Insurance Rate Map, flood
insurance is required during construction when the property becomes insurable, and upon
completion, in the amount required by the Flood Disaster Protection Act of 1973.
B. Permanent Insurance. Upon acceptance of the project, or any portion thereof from the contractor, the
lender must provide a certified duplicate copy of the following insurance coverage. In some instances,
continuation of the insurance obtained for the construction period, with proper endorsements thereto,
will be acceptable. In any event, the lender must assure that there is no gap period in insurance
protection during the transition from the Insurance During Construction to the Permanent Insurance.
1. Public Liability Insurance on a Commercial General Liability form with limits of not less than
$500,000 per occurrence to protect the mortgagee from claims involving bodily injury and/or
death and property damage which may arise from the mortgagee’s operations, including any
use or occupancy of its facilities, grounds and structures, and must include independent
contractors coverage, where applicable.
2. Vehicle Liability Insurance. If the mortgagee owns a vehicle in the operation of the project,
including non-owned and/or hired vehicles operated for the benefit of the mortgagee, the
mortgagee must maintain Vehicle Liability Insurance. Such insurance must provide for limits
of liability of not less than $300,000 for one person and $500,000 for more than one person to
protect the mortgagee from claims for bodily injury and/or death, and not less than $100,000
against claims for damage to property of others.
3. For properties in a Special Flood Hazard Area on a FEMA Flood Insurance Rate Map, flood
insurance is required during construction when the property becomes insurable, and upon
completion, in the amount required by the Flood Disaster Protection Act of 1973.
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4. Casualty Insurance.
Also known as “fire and extended coverage” is insurance to protect borrowers (and lenders
and HUD) from losses caused by fire, storm, wind and similar accidents or natural hazards.
i) Insurable Values. The amount of damages covered and the amount of coverage needed are
both based on the replacement cost of individual buildings not including land or site
improvements, meaning the actual current cost of replacing the building, not value or
depreciated original cost. For each building this sum is known as its “insurable value.” The
dollar amount payable in any casualty event will not exceed the actual cost of damages
calculated on a building by building basis and for each building will not exceed the
insurable value for that building. For this reason, methods of estimating insurable value that
prorate gross cost among dissimilar buildings may under (or over) state actual replacement
cost resulting in a risk of loss not covered by insurance. Most states regulate casualty
insurance coverage and prohibit “over insurance” because it is an inducement to arson and
insurance fraud. For HUD programs, replacement cost (insurable value) must be estimated
for each structure in a property and is reported on form HUD 92329 (See Chapter 5 and
Appendix 5G).
ii) Minimum Coverage Amount. Provided that any co-insurance requirement is met (see
below), the borrower must provide casualty insurance with a face amount which is the lower
of: 80% of insurable values; or the balance of the insured mortgage(s). (See FHA form
2447, section 5(a)).
iii) Limitations of Borrower’s Obligation to Share Cost of Damages. HUD’s minimum
coverage requirements protect borrowers by limiting their obligation to share the costs of
damages when a casualty occurs and by assuring that the insurance proceeds are sufficient
to pay the commensurate portion of the principal amount of any insured mortgage(s) when a
damaged building cannot be restored.
Typically, insurers require borrowers to share the cost of damages by one (or both) of two
methods: deductibles, and co-insurance requirements. HUD limits borrowers’ exposure as
follows:
(a) Deductibles may not exceed the greater of $25,000 or 1% of the insurable value for any
particular building up to a maximum amount of $250,000;
(b) The borrower must purchase casualty insurance in an amount that equals or exceeds any
applicable co-insurance requirement. This limitation prevents borrowers from purchasing
insurance policies that require borrowers to pay a share of damages on partial claims (i.e.
claims for less than total losses). A co-insurance requirement is expressed as a ratio or
percentage that the maximum insured loss for any casualty event bears to the aggregate of
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insurable values for a property. The maximum insured loss is also commonly called the
“face amount” of the insurance policy and is the insurer’s maximum obligation for
damages from any casualty event. Recognizing that total losses are quite rare, especially
for multi-building properties, borrowers often seek to reduce premium costs by reducing
the face amount of insurance purchased. A co-insurance clause requires borrowers to
share in any loss if the face amount of insurance purchased is less than the co-insurance
requirement. A co-insurance requirement typically, but not always, imposed by insurers
is 80%, meaning the face amount of insurance purchased should equal or exceed 80% of
insurable values. With this co-insurance requirement, if a borrower purchases a face
amount of insurance which is 65% of insurable values then the insurer’s obligation to pay
any claim will be limited to 65% of the claim, leaving 35% (plus any deductible) to be
paid by the borrower. If the borrower purchases a face amount equal to or exceeding the
co-insurance requirement, then the insurer is obligated to pay 100% of any claim (less
any deductible) up to the face amount of the policy.
iv) Exceptions. In some circumstances such as large properties with multiple buildings and
properties included in a portfolio with multiple tiers of casualty loss coverage, a waiver of
the 80% of insurable values minimum may be considered provided that the lender
demonstrates the adequacy of coverage in light of possible casualty events and that the
borrower is not obligated to share in losses arising from partial claims.
C. Other Insurance Requirements. Both HUD and the lender must be named as additional insured on the
policies of insurance. All insurance carriers or providers which issue policies of insurance on a HUD
insured project must have and must maintain during the policy period a rating that is acceptable to
HUD (A.M. Best Financial Strength Rating [FSR] of B+ or better). Further detail of ongoing
requirements for insurance coverage after Endorsement may be found in the Asset Management
handbook (HUD HB 4350.1). The amount of property insurance required is further discussed in the
Asset management Handbook.
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Chapter 3
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Large Loan Risk Mitigation Policies
Document page 91
Chapter Index / Section Index
Large Loan Risk Mitigation Policies
A. Purpose.
This section defines the underwriting standards for large multifamily loans, primarily those above $75
million. Except where otherwise stated, these policies do not apply to:
a) loans below $75 million,
b) refinancing loans processed under Section 223(a)(7),
c) refinancing or substantial rehabilitation loans for properties with rental assistance contracts covering
90% or more of the property’s units, or Low Income Housing Tax Credits with actual rents at least
10% below market, or
d) the insurance programs administered by the Office of Healthcare Programs.
B. Underwriting and Reserve Standards for Large Loans.
1. The following DSCR, LTVR and LTCR underwriting standards shall be applied incrementally as loan
sizes increase:
New Construction/Sub Rehab under Sections 220, 221 (d)(4), 231, 241(a) on loans at or above $75M:
Loan Size
Affordable DSC
Affordable LTC
Limits
Limits
Limits
<$75M
1.15
87%
>$75M*
1.25*
80%
*Represents current underwriting guidance
Market DSC
Limits
1.176
1.30%
Market LTC
Limits
85%
75%*
Refinancing under Section 223(f) on loans at or above $75M:
Loan Size
Limits
Affordable DSC
Limits
Affordable LTV
Limits
without/with cash out
<$75M
1.15
87%/80%
>$75M*
1.25*
80%*/70%*
*Represents current underwriting guidance.
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Market DSC
Limits
Market LTV Limits
without/with cash out
1.176
1.30*
85%/80%
75%*.70%*
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Projects with greater than 90% Project-based rental assistance may be underwritten at up to 90% Loan
Ratio, or 1.11 Debt Service Coverage for all programs, so long as the loans amount is less than $75
million.
2. Minimum Initial Operating Deficit (IOD) and Debt Service Reserves for Large Loans.
New construction/substantial rehabilitation projects with both a loan amount at or above $25M should
have a minimum amount of Initial Operating Deficit Reserve to help assure success of these projects
during their early, most vulnerable stages of rent-up.
A minimum Debt Service Reserve is required for Large Loan Section 223(f) transaction which do not
have at least 3 years of demonstrated stable occupancy and operations as well.
The following minimum Reserve amounts apply to Sections 220, 221 (d) (4) and 231 Loans (as
IOD’s) and Section 223(f) Loans (as Debt Service Reserves). If the amount determined under Section
7.14 of the MAP Guide “Calculating Operating Deficits” exceeds the amount shown below, the MAP
Guide amount takes precedence.
Reserve amount based on minimum number of months of
amortizing debt service, including MIP
Between 4 to 6 months debt service
9 months debt service
12 months debt service
12 months debt service, unless a higher amount is identified through
HUD analysis of the risks and the mitigants appropriate to the
particular loan application
Note: for projects $25M or more which will complete rent-up within
12 months of construction completion, the stated minimum number
of months of debt service may be reduced by 3 months.
Loan size
<$25M
$25M – $75M
>$75M
>$100M
3. Loans greater than $100 million.
Based on HUD’s analysis of the risks and the mitigants appropriate to the particular loan application,
the required minimum DSCR, LTCR or LTVRs, and the minimum Initial Operating Deficit or Debt
Service reserve requirements for loans over $100M may be increased. Lenders should detail
appropriate risk mitigants for such transactions, which will be reviewed on a case-by-case basis.
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4. Eighteen (18) month Maximum Absorption Period.
The absorption period for estimating market demand is limited to 18 months. Regional Office
Directors may waive the 18-month absorption period restriction only in cases where there is an
unusually strong market which will support initial rent-up to sustaining occupancy beyond 18 months
and where the borrower has clearly demonstrated successful experience with developing such projects
in the recent past. Such projects may require larger Initial Operating Deficit or Debt Service
Reserves.
5. Other Underwriting Requirements for Large Loans.
The following underwriting and mortgage credit requirements will apply to Large Loans:
i. Principal’s net worth and liquidity requirements for loans greater than $75 million:
Principals of the borrowing entity must have, in aggregate, net worth equal to at least 20% of the loan
amount and liquidity equal to at least 7.5% of the loan amount. This requirement may be waived
for sponsors of subsidized affordable housing properties.
ii. Recognition of land or building value appreciation for loans greater than $25 million:
For properties refinanced under Section 223(f), or for land or buildings contributed for
development under Sections 220, 221 (d) (4) and 231, the HUD review appraiser may not
recognize an increase in the appraised value above the borrower’s acquisition cost plus the direct
costs incurred for property improvements, unless the borrower has owned the property for 3 years
or longer as of the date of application.
For properties owned for less than 3 years as of the date of application, the recognized value of the
property will be the lower of: a) the appraised value, or b) the property acquisition cost plus direct
costs incurred by the borrower for improvements to enhance or upgrade the property, such as to
rehabilitate or upgrade an existing building, to obtain a zoning change, or for improvements to
land such as removal of environmental hazards or improvements to infrastructure, which costs and
improvements must be documented by the borrower and verified by the lender.
For properties owned for less than 3 years as of the date of application, the Regional Center
Director may issue a waiver to permit recognition of an increase in the appraised value above the
property acquisition cost plus the cost of improvements, only if both of the following criteria are
met:
a) The values of comparable properties located in the subject’s submarket have also
increased since the date of acquisition, and
b) The value increase is based on an increase in property NOI due to improved property
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operations and is not based solely on recognition of a capitalization rate that is lower
than what was prevalent in the market or was applied by the sponsor at the time the
property was acquired.
iii. Experience requirements for large new construction or substantial rehabilitation projects with
loans greater than $25 million.
Large Loan borrowers must have substantial prior experience developing, constructing and
owning multifamily projects that are similar in size and scope to what is proposed. Borrowers or
contractors without substantial prior experience in multifamily construction, lease up and property
operations, and who have not previously successfully owned or developed other large multifamily
projects, will not qualify for a Large Loan under any of the Multifamily New Construction or
Substantial Rehabilitation programs. Borrowers with no experience operating multifamily rental
housing will not be considered for acquisition financing under Section 223(f) unless there are
significant mitigants (e.g. the principals have clean credit, strong diversified financial capacity,
and the property will be managed by a third party management agent with relevant and positive
HUD experience, conservative valuation.)
Related experience in single family development or in development of commercial properties is
not an acceptable substitute for the required prior multifamily experience and may not be a basis
for a waiver of the experience requirement.
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4.1
Chapter 4
Application Processing
Introduction / General
Document page 95
Chapter 4
Application Processing
4.1
Introduction / General
Only an approved MAP Lender and MAP-approved Underwriter may submit an application for insurance
using MAP. Lenders should contact the MF Regional Center’s Workload Distribution Lead to discuss the
submission of an application for insurance using MAP.
Approval of Lender's Reviewers. The lender is responsible for assigning a MAP-approved Underwriter,
who is responsible for selection and management of their third party consultants. If a Regional Center or
Satellite Office has concerns about an underwriter or a proposed third party consultant, they should
contact the Multifamily Asset Counterparty Oversight Division before responding to the lender.
The lender must advise HUD who will be the Construction Loan Administrator prior to the Firm
Commitment stage if the closing and servicing lender has been identified, or as soon as identified.
4.2
Stages of Application
A. Refinancing Applications (Sections 223(f), 223(a)(7)).
1. Concept meetings (or conference calls) with the MF Regional Center or Satellite Office are
optional and generally not needed for refinancing transactions. They are recommended for
projects in volatile markets, large loan requests, questions about the scope of repairs, significant
cash out, if there are concerns about marketability, environment, competing proposals, for projects
with significant cash out, or if there are other unusual risk factors. Upon the lender’s request, the
MAP Coordinator will schedule the meeting either in person or by teleconference as soon as
workload permits, generally within two weeks. Site visits by the appropriate HUD staff may be
conducted if practicable. Please refer to Appendix 4 for concept meeting exhibits.
HUD will respond by written letter or by email within 5 business days of the concept meeting.
Consideration will be given as to the effect on other insured projects in the subject’s market area
that are already in the pipeline or in portfolio, developer experience and overall feasibility based
on the exhibits and information presented. Depending on the completeness and quality of the
submission, HUD may recommend that the lender submit an application, request additional
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information, or specify conditions or recommendations to consider. The written response to the
concept meeting does not represent a commitment from HUD nor that a letter of invitation will be
issued, and this should be clearly stated in the response. Based on the preliminary information
submitted, HUD may encourage an application submission but not approve it after review of the
actual application.
2. Firm Commitment application submissions will be reviewed for completeness, processed,
reviewed and underwritten and either recommended for approval or approval with conditions,
returned to the lender for modifications, or rejected.
3. Loan Approval is either by National Loan Committee, Regional Center/Satellite Office Loan
Committee, or Regional Director signature authority. Loan Committee requirements are specified
in administrative memoranda to HUD staff.
4. Firm Commitment issuance.
5. Firm Commitment acceptance and rate lock. Firm Commitments may be extended up to no more
than 180 days from date of insurance. After that time, a reopening fee of 50 basis points is
required.
6. Closing.
B. New Construction and Substantial Rehabilitation Programs.
1. Concept meetings (or conference calls) with the MF Regional Center or Satellite Office are
required for market rate new construction or substantial rehabilitation transactions (unless waived
by the Regional Director) and optional for affordable transactions. The process for concept
meetings is the same as for refinancing transactions. Lenders may submit applications for market
rate deals without a concept meeting; however the application fee will be considered “earned” at
acceptance of the application for processing and will not be refunded if the application is rejected
or not approved under terms acceptable to the lender and borrower.
The lender may request to skip the Pre-application stage to go directly to Firm Commitment
application. Lenders should only consider such requests for projects in strong markets, where the
lender and borrower acknowledge in writing the risk of a rejection and that the application fee is
nonrefundable, so long as there are no environmental issues, and the lender, borrower, and
development team members have previous positive experience with FHA Multifamily financing.
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2. The Pre-application stage for new construction or substantial rehabilitation is designed to permit
HUD to review the feasibility of a proposed project prior to the lender, borrower, and HUD
spending the time and expense involved in Firm Commitment processing. Pre-application
submissions will be reviewed for completeness, processed, reviewed and underwritten, and either
recommended to be approved, approved with conditions, returned to the lender for modifications,
or rejected.
If an invitation letter is issued, the lender must advise HUD in writing within 30 calendar days if it
plans to submit a Firm Commitment application. If it fails to notify HUD, the invitation letter will
expire and the lender will be required to repeat the Pre-application process. Letters of invitation
are issued and effective for 120 calendar days.
The application for a Firm Commitment must be submitted within 120 days of the date of the letter
of invitation. The Regional Director may or may not authorize one extension up to 90 days. The
HUD Underwriter will review the lender’s extension request.
If there is a justifiable request by the lender for an extension of time beyond the time period
allowed (210 total days), the Regional Director must request approval for a further extension from
the Director of the Office of Multifamily Production, in HQ stating the additional time requested,
the Regional Director’s recommendation and the reasons for the extension.
3. Loan Approval is either by National Loan Committee, Regional Center Loan Committee, or
Regional Director signature authority.
Loan Committee requirements are specified in
administrative memoranda to HUD staff..
4. Firm Commitment acceptance and rate lock. Firm Commitments may be extended up to no more
than 180 days from date of issuance. After that time, a reopening fee of 50 basis points is required.
5. A pre-construction conference is required prior to Initial Endorsement / Closing.
6. Closing.
7. Construction period.
8. Cost Certification.
9. Final Endorsement.
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C. Appeals.
Lenders have the right to appeal HUD decisions regarding the issuance of an Invitation for Firm
Application or Firm Commitment with which they do not agree. There is no appeal process for the
concept meeting recommendation. Other parties (borrowers, third parties) do not have a formal right
to appeal. Appeals must be filed in writing, delivered electronically and by hard copy, to the Regional
Director. The appeal must explicitly address the basis for the appeal and disagreement, and include
supporting documentation and background information, including a copy of relevant previous
correspondence and reports.
The Regional Director will assign the appeal for review to staff not involved in the original decision.
The Regional Director will issue a written response to the Lender within 30 days of receipt of the
appeal, or such other period of time as practicable. If the original decision being appealed was a result
of a Regional Center Loan Committee which the Regional Director participated in, the Regional
Director will either hear the appeal or may request it be treated as a second level appeal and referred to
HUD Headquarters.
If the lender is not satisfied with the appeal decision, they have the right to a second level appeal,
which should be addressed to the Director of Production in HUD Headquarters. The Director will
assign the appeal for review to technical support or other staff not involved in the original decision.
The Director will issue a written response to the Lender within 30 days of receipt of the appeal, or
such other period of time as practicable.
4.3
Lender Processing
A. General Requirements.
1.
Borrower engagement letters are expected as a prudent business practice, but not regulated by
HUD. Only one MAP lender may be engaged at a time. If a borrower changes MAP lenders prior
to or after submission of an application, the borrower must disclose the processing history, and the
MAP Lender submitting the application must address it in the Underwriter Narrative Executive
Summary.
2. Lenders must have a written contract (engagement letter) with Third Party reviewers; HUD
recommends extension clauses as part of the contract.
3. Electronic submission of applications material, Standard Underwriting Narrative, and data through
the electronic “wheelbarrow” is required. Application checklists are in Appendix 4. HUD will in
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the future continue moving to complete electronic submission and processing through a web-based
portal.
4. MAP Lenders are required to comply with the procedures and management controls specified in
their Quality Control Plans.
5. Pre-Approval of Principals with Large Concentrations of FHA Insured Debt. The lender must
perform a thorough mortgage credit and creditworthiness review, and obtain HUD approval, before
submission of an application in cases where principals have greater than $250,000,000 of
outstanding FHA insured debt. Please refer to Section 8.8 for additional information.
6. Lenders may produce their own copies of HUD forms, so long as the recreated forms have the
correct Office Management and Budget (OMB) numbers, HUD form numbers, OMB expiration
dates, and approval numbers, form titles, and are identical in content and order of the line items on
the MAP Form. All forms must be completed subject to their respective instructions. (See
HUDClips,
http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/forms.)
7. A complete application submission includes one original, one additional hard copy and one
electronic copy. The additional hard copy should be in a separately bound mortgage credit file, and
the rest of the application containing the exhibits which do not contain sensitive personal and
Privacy Act protected information. A standardized underwriting narrative and more structured
application checklist are now required as well.
B. Processing
The lender’s MAP approved Underwriter is responsible for oversight and performance of the
following tasks:
1. Data collection;
2. Due diligence;
3. Loan Processing;
4. Mortgage Credit review;
5. Underwriting;
6. Obtain internal loan approval (from the lender’s loan committee or other process);
7. Submission of the loan application to the appropriate Regional Center or Satellite Office and the
application fee to Pay.gov. See Appendix 4 for pay.gov instructions;
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8. Responding to HUD deficiency letters and requests for information;
9. Follow-up to get the loan to closing;
10. Coordination with construction loan administration, cost certification, and servicing.
4.4
HUD Processing
A. General Requirements.
1. Under the direction of the MF Regional Director, the HUD Underwriter is responsible for
management of the application processing, review, underwriting, loan approval and closing
processes, as well as coordination of turn over to Asset Management at closing.
2. HUD review is a risk based, underwriting approach. Technical compliance and processing must be
correct and documented, but the primary purpose of HUD’s review is to determine if the loan
application is an acceptable risk to the FHA insurance fund.
3. Standard Processing Times are detailed in Appendix 1.
4. The HUD Underwriter will review all application exhibits and determine what technical reviews
are necessary, if any, given the level of complexity and risk of the transaction and program type,
and perform or arrange for the underwriting and mortgage credit analysis.
Risk-based processing and the single underwriter model will allow qualified underwriters to
review architectural/cost exhibits, appraisals, and market analyses, and solicit the assistance of
appropriate HUD technical specialists to perform additional reviews as necessary depending on the
level of risk and complexity of each individual transaction. A Construction Analyst may be called
upon to advise the underwriter in his or her review, or to perform a limited review or full review,
as determined by the Production team. The level of review by the HUD Construction Analyst may
vary but, the work required from the lender’s third party provider has not changed. The MAP
Lender and third party provider are responsible for determining the acceptability of the physical
improvements, providing conclusions essential for underwriting determinations to minimize
mortgage risk, and ensuring compliance with MAP Guide instructions and guidance. Similarly,
the HUD Appraiser may be called upon to act in an advisory role or perform limited or full
reviews as deemed appropriate by the HUD Production team.
5. HUD has certain responsibilities which it does not assign to the lender, including responsibility for the
environmental clearance, approval of the owner’s Affirmative Fair Housing Marketing program,
Previous Participation review, and issuing the commitment for mortgage insurance.
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6. HUD staff must perform a site visit for all applications in which an Environmental Report is required.
Environmental approval is documented by HUD in the HUD Environmental Review Online System
(HEROS) - Form HUD-4128. The lender and the third party consultants prepare information for
HUD’s review and assistance in completing the review. The form HUD-4128 must be signed by the
Regional Director or other delegated authority as part of the Firm Commitment approval. The site visit
is typically performed by a HUD Appraiser, Construction Loan Analyst, Senior Underwriter, or other
experienced HUD staff or managers with training and experience in environmental review
requirements after review of the third party and lender’s environmental analysis. HUD Regional and
Headquarters Environmental Officers may be called on to assist if and as questions arise.
7. Applications which the Regional Center or Satellite Office determine to be unacceptable will be
returned to the lender and HUD will retain the application fee if the transaction completed
screening and was put into underwriting and technical review. If it is clear at the screening stage
the transaction is not approvable, it will be rejected at that stage. Lenders repeatedly submitting
premature, materially deficient, or otherwise unacceptable applications should be referred to the
Multifamily Asset Counterparty Oversight Division.
8. Review of MAP Lender Team Members. HUD must check the Limited Denial of Participation
List and the Consolidated List of Suspended and Debarred Contractors for all proposed lender
team members, and review the proposed MAP Lender and underwriter, and third party resumes. If
there is a concern with past performance, the Regional Director will consult with Multifamily
Asset Counterparty Oversight Division for guidance on how to proceed. If appropriate, adverse
findings or conclusions should be communicated to the lender within 10 business days.
B. Processing.
Under the direction of the MF Regional Director, Production Division Director, and Underwriter
Branch Chief, the HUD Underwriter is responsible for the oversight and performance of the following
tasks:
1. Concept meetings and follow-up communication;
2. Reviewing of proposed MAP Lender and Underwriters;
3. Working with the Workload Distribution Lead for the Region and other appropriate officials in
managing workload assignments for new applications;
4. Acknowledging receipt of the application;
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5. Ensuring the screening of applications for completeness, and fiscal controls for new application
submissions;
6. Using the New Early Warning System (NEWS) to determine what level of underwriter and
technical specialist review is required given the complexity and risk factors associated the
transaction;
7. If during underwriting and technical review, HUD staff determines the application to be deficient,
advising the lender who will have 5 business days to correct the defects or deficiencies. If the
defects/deficiencies cannot be corrected within the 5 business days, or such other time frame as the
Regional Director deems appropriate, HUD will preliminarily reject the application and stop
processing;
8. Performing technical reviews of lender underwriting and third party reports, or arranging for HUD
technical specialist reviews for higher risk or more complex transactions when needed;
9. Consulting with and obtaining reviews from Asset Management, Legal, Labor Relations, EMAD,
FHEO, and other HUD staff as appropriate depending on the program requirements and particular
transaction features; Recommending transactions for loan approval (or rejection);
10. Determining whether there are any open referrals to HUD’s Departmental Enforcement Center
(DEC) relating to the Project, the borrower and/or the proposed management agent; and working
with the DEC to resolve the open DEC referrals either prior to, or in tandem with, closing.
11. Preparing and issuing Pre-application Invitation letters and Firm Commitments;
12. Coordinating the closing process with the Closing Coordinators, OGC, the lender, and borrower’s
team;
13. Coordinating with Asset Management in turnover of files, briefing about conditions of the Firm
Commitment, and providing information necessary for Asset Management’s risk rating of the
transaction.
C. Construction Period Responsibilities.
1. Under MAP, HUD must approve the initial and final draws.
2. HUD will perform or contract or otherwise provide for inspection duties and will provide copies of
the Trip Report to the MAP Lender.
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3. The MAP Lender will prepare and approve the documents required for the interim draws during
construction.
4. HUD must approve the construction amount for each item in the initial and final advance and for
each Change Order during construction.
D. Servicing.
MAP makes no changes in procedures for servicing or asset management, except for servicing
lenders with prior approval for delegated responsibility for repair escrow administration. See Section
1.2 above for guidance on MAP-approved lenders who only originate loans and transfers the loan to
another FHA-approved lender for servicing.
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Chapter 5
Architectural & Construction
Analysis
5.1
Classification of Work and Eligible Construction Activities
Construction activities eligible for insured mortgage programs are described in terms of costs and scope
for two purposes. The first purpose is to determine eligibility of the construction activity by program, i.e.,
by Section of the National Housing Act. The second is to identify what design documentation,
construction supervision and management, and work inspection methods are most appropriate to the
proposed work.
A. Classification of Work.
Classification of work is an important aspect of scope. Construction activity is either new construction
(erecting buildings not previously in existence) or some level of work on existing structure(s). The
class of work with the largest scope is “new construction.” Classes of work on existing structures are
defined in the International Building Code for Existing Structures (2012, Chapter 5). These classes of
work, in order of scope from least to greatest, are:
1. Repair: “The restoration to good or sound condition of any part of an existing building for the
purpose of its maintenance.” (IBC, Section 202) Repairs to site features (not buildings but
otherwise similarly defined) are included in this class of work. “Repairs include the patching or
restoration or replacement of damaged materials, elements, equipment or fixtures for the purpose
of maintaining such existing components in good or sound condition with respect to existing loads
or performance requirements.” (IBC, Section 502) Repairs also include related work. Related
work is “work on non-damaged components necessary to accomplish the required repair of
damaged or deficient components.” (IBC Section 502.3) In addition, installation of items not
previously present in a building or on a site but necessary to address safety, security, accessibility
or communications needs are considered repairs when such installation and related work does not
require alterations. Examples of such installation include but are not limited to smoke detectors
added to bedrooms, signage or pavement markings added to identify accessible paths, panic bars
added to exit doors, etc.
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2. Level 1 Alterations: “The removal and replacement or the covering of existing materials,
elements, equipment, or fixtures using new materials, elements, equipment, or fixtures which serve
the same purpose.” (IBC Section 503.1)
3. Level 2 Alterations: “The reconfiguration of space, the addition or elimination of any [exterior]
door or window, the reconfiguration or extension of any system, or the installation of any
additional equipment. (IBC Section 504.1)
4. Level 3 Alterations: “Alterations where the work area [consisting of all reconfigured spaces]
exceeds 50% of the aggregate area of the building.” (IBC Section 505.1)
B. Building Systems.
Program eligibility for a scope of work may also be determined by the replacement of building
systems.
1. For purposes of determining program eligibility, there are five building systems:
a. Structural frame, including foundations, load bearing walls, floor frame, and roof frame;
b. Building envelope, including exterior moisture and weather proof membranes, roofing,
cladding, siding, windows and exterior doors and openings;
c. Mechanical, including heating, ventilating and air conditioning equipment and related fuel
supply or exhaust items, as well as specialized mechanical apparatus such as elevators and
escalators;
d. Electrical, including all electrical appliances (not mechanical) and lighting fixtures, electrical
supply lines and panels, breakers, warning systems, and telecommunications and related
equipment.
e. Plumbing, including all potable water, grey water, and sanitary waste lines, valves, pumps,
controls, and fixtures.
2. A system is considered ‘replaced’ when the costs of replacement work equal or exceed 50% of the
cost of replacing the entire system. In the case of properties with multiple buildings, “entire
system” refers to the referenced system in all buildings.
C. Eligible Construction Activities by Program.
1. Section 223(a)(7): Repairs and Level 1 Alterations are permitted provided that they do not exceed
routine maintenance, (See Chapter 9.1 Subsection A, paragraph 5.) Work requiring environmental
review is not permitted for Section 223(a)(7) applications. In no event shall the aggregate costs of
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such repairs and alterations (exclusive of those required to make properties accessible for persons
with disabilities) exceed $1,500 per unit.
2. Section 223(f): Repairs and Level 1, Level 2 and Level 3 Alterations are permitted provided that
the aggregate of all such repairs and alterations is not substantial rehabilitation as defined below.
Additions (meaning expansion of a building footprint with conditioned space) are not permitted to
residential buildings. (Adding a patio or a balcony is considered a level 2 alteration) Additions to
accessory buildings or additions of minor accessory structures (e.g. carports, storage sheds,
swimming pools) may be deemed level 2 or 3 alterations subject to the approval of the Director of
the Regional Center/Satellite Office;
3. Sections 220, 221, 231, 241(a): new construction and all repair and alteration activities are
permitted.
D. Substantial Rehabilitation.
Substantial rehabilitation is any scope of work described for existing buildings of a property where the
scope:
1. Exceeds in aggregate cost a sum equal to the base per dwelling unit limit times the applicable High
Cost Factor times the number of dwelling units proposed for the property after completion of any
construction; or
2. Replaces two or more building systems.
The base per dwelling unit limit was established at $6,500 in 1983 and is now obsolete because of
inflation in construction costs over the past 30 years. The base limit is revised to $15,000 per unit,
and will be adjusted periodically based on the percentage change published by the Consumer
Financial Protection Bureau or other inflation cost index published by HUD. In this context,
“aggregate cost” means all costs reported (or which, if known, would have been reported) on HUD
form 2328 Contractor’s or Mortgagor’s Cost Breakdown, including any used contingency or
assurance of completion. The lender must assure that the cost of repairs and alterations in
refinance transactions does not exceed the program eligibility limit notwithstanding any
unforeseen circumstance or construction estimating error. (See Section 5.11, subsection D,
paragraph 4 for eligibility of fees paid or payable to identity of interest participants).
E. Extent of Substantial Rehabilitation: Gut Rehabilitation.
For some purposes (e.g., defining the scope of work for a CNA or benchmarking utility consumption)
the extent of substantial rehabilitation must be further analyzed to determine when past building
performance is relevant for predicting future results. When a rehabilitation scope of work retains little
more than the structural frame of a building (“gut rehabilitation”), the past performance of the existing
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building is of limited relevance. Estimates of future results should be based on proposed plans and
specifications, as in new construction.
When the property is composed of a single building, gut
rehabilitation is defined as Level 3 Alterations. When there are multiple buildings, gut rehabilitation is
defined as Level 3 Alterations in buildings that include 75% or more of the total building area of the
property.
F. Substantial Rehabilitation: Section 223(f)-- Three Year Rule Look-back.
Section 223(f) applications for uninsured projects are subject to the three year rule, i.e., projects are
ineligible if the property was constructed or substantially rehabilitated within three years of
application. For these projects it may be necessary to analyze the extent of rehabilitation
retrospectively. Owners of existing properties often complete repairs and alterations as part of
ongoing capital replacements or to maintain or upgrade properties in preparation for a capital
transaction. If these repairs and alterations exceed the thresholds described in paragraph D above, a
property is not eligible for Section 223(f). When applying the thresholds retrospectively, exclude:
1. Repairs and alterations completed prior to three years before the date of application; and
2. Repairs and alterations that would normally occur at the property as capital replacements
reimbursable from a Reserve for Replacement Escrow.
Include all work authorized by a building permit or construction agreement that describes a scope of
work exceeding the thresholds when any portion of that authorized work was completed after the
beginning of the three year look back period even if the date of the building permit or construction
agreement preceded the look back period.
5.2
Qualifications, Responsibilities, and Approval of Due Diligence
Consultants
A General.
The lender and the borrower are required to retain competent third party consultants with skills,
training and experience appropriate to the scale and scope of the physical characteristics of the
property, the nature of architectural and engineering documents required, the kinds of construction
solutions existing or proposed, and the due diligence typical of multifamily real estate transactions. In
the context of this Chapter 5 the term “due diligence” is not a standard of behavior but a generic term
for the range of professional examinations, studies, inquiries, research reports and investigations
needed to determine the physical condition, utility and suitability of sites and buildings existing or
proposed for multifamily properties.
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Historically, HUD required lenders to retain either a construction analyst (aka “architectural analyst”
and/or “cost analyst”) to review the project architect’s plans for new construction and substantial
rehabilitation applications, or a needs assessor to prepare a capital needs assessment or CNA for
refinancing applications. Borrowers were required to retain the services of the project architect. Policy
changes initiated in this edition of the MAP Guide change the mix of consultants required by program
and by class work. These changes are;
1. The required preparation of capital needs assessments for all applications;
2. The required use of a project architect to prepare construction documents for refinancing
transactions that include certain categories of work or dollar values of repairs and alterations;
3. The required evaluation of utility consumption for most properties, and;
4. The required documentation of energy conservation measures (ECMs, aka “energy efficiency
measures or EEMs) for properties with energy scores below prescribed minimums.
While the lender may retain (or require the borrower to retain) a variety of specialists when needed,
the primary consultants are the lender’s construction analyst, the lender’s needs assessor, the project
architect retained by the borrower, and the energy professional who may be retained by any of the
other participants. (The duties, responsibilities and qualifications of the project architect are described
in Section 5.3 of this Chapter.)
Whenever a borrower is required to retain a project architect, the lender is also required to retain a
qualified construction analyst unaffiliated with the project architect to review the work of the project
architect. In general a consultant may not both prepare and review the same due diligence product, and
in particular, a single consultant may not serve as both project architect and construction analyst.
When a project architect is not required for a transaction, the needs assessor and construction analyst
roles are typically combined and the lender underwriter reviews the work of the needs assessor. The
needs assessor may prepare dimensioned sketches or diagrams when needed to illustrate particular
repairs and alterations, a service particularly useful to describe remedies for accessibility deficiencies.
Energy professionals generally have experience and training similar to other architectural and
engineering and construction consultants, but also have more narrowly focused skills and
qualifications that are evidenced by recognized certifications. Subject to the requirement that no
consultant may review their own work and that the energy professional must have recognized
certification, any consultant may verify utility consumption data and provide energy audit services.
Energy professionals may be retained by either the lender or the borrower, and verification of utility
consumption data and energy audits are services that the needs assessor or the project architect may
provide.
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B. Scope of Work, Duties and Qualifications for Lender’s Consultants.
1. Construction Analysts.
a. Qualifications.
The lender must hire a qualified construction analyst(s) with experience in multifamily
construction to review the drawings and specifications prepared by the project architect and
any related agreements for design and/or construction services. The analyst must be
knowledgeable and experienced with local building standards and construction methods,
relevant national or international building codes and standards (e.g., International Existing
Building Code, International Energy Conservation Code) and specific statutory or regulatory
requirements for multifamily housing (e.g., Federal Fair Housing Act Accessibility Guidelines
and the Uniform Federal Accessibility Standards, UFAS). In all cases the lender must assure
that the work experience of the construction analyst is consistent with the scale, scope,
materials, methods and technologies proposed for or existing at the property.
The lender’s construction analyst should be a licensed or registered architect or physical
engineer but must, at a minimum, have a degree (BS or BA) in architecture, civil or structural
engineering or construction with five years of experience in design, construction, or
development of multifamily buildings. Alternatively any person who is a construction contract
administrator with a current certification (CCCA) by the Construction Specifications Institute
(CSI) and who has administered construction of not less than three multifamily properties with
an aggregate construction cost not less than $30 million may serve as a construction analyst.
b. Scope of Work, Duties and Responsibilities.
The construction analyst must:
1) Visit the site and its environs investing time and attention sufficient to support a
knowledgeable and professional review of the due diligence requirements and products as
well as the design, specification and construction documents to be prepared;
2) Evaluate the design of proposed and/or existing buildings and the construction materials,
methods or technologies employed in the buildings;
3) Review the borrower’s required architectural services (See Section 5.3);
4) Evaluate the professional qualifications and experience of the borrower’s design and
construction team members and any due diligence professionals or contractors retained
by the borrower to assure conformance to HUD requirements and relevance of
qualifications and experience to the anticipated scope work;
5) Determine that the borrower’s and project architect’s due diligence concerning physical
attributes of the site or of existing buildings is sufficient to expose and quantify such
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costs and risks as may be reasonably expected based on observed conditions and
identifies any unmet due diligence needs;
6) Evaluate architectural design, specification, construction contract, and cost and
scheduling documents for proposed projects and assure internal consistency, accuracy,
reasonableness, and conformance to HUD requirements, including specifically: the
Minimum Property Standards; local codes and the HUD minimum energy conservation
code when this code exceeds local codes; accessibility requirements for persons with
disabilities; and HUD standards for architectural drawings and specifications (See
Appendix 5);
7) Review the project architect’s certification that the project design complies with the
Minimum Property Standards, all applicable local codes and ordinances, accessibility
requirements, and HUD standards (See Appendix 5);
8) Prepare a complete cost analysis and review and confirm the reasonableness of
borrower’s costs for design, specification, construction, contract administration and
supervision (and any related due diligence or other professional services) for the
construction, alteration or repair of multifamily structures;
9) Evaluate the professional liability and errors and omissions insurance for the project
architect and borrower’s other design or due diligence professionals by comparing the
risks covered and the dollar amount of loss coverage to the scale and cost of construction
and/or evident risks, offering an opinion of the adequacy of such coverage and
confirming that such insurance will be maintained through any warranty inspection
period following endorsement;
10) Maintain a dated log of all contacts, messages and conversations with the project
architect and the borrower’s design team referencing all documents and version thereof in
the log;
11) Ensure that all relevant parties are informed of HUD requirements and communications
and coordinate responses thereto;
12) Prepare or review the schedule of anticipated future capital needs and corresponding
estimates of costs;
13) Review and confirm as part of the CNA the accuracy of estimates of replacement cost
(new) for each structure (HUD form 92329).
14) Identify, review and describe to HUD any identities of interest among any members of
the design, construction and/or due diligence team or between any such member and any
principal of the borrower or between any such member and the lender; and
15) Provide advice and assistance on design, construction and physical due diligence issues
to borrowers, consultants, contractors and others.
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NOTE: Construction analyst(s) must apply the specific standards or criteria enumerated in the
Appendices to this Chapter 5. The construction analyst is not required to review structural design
details and calculations.
2. Needs Assessors.
a. Qualifications.
The lender must select a needs assessor it determines to have education, professional
credentials and field experience appropriate to the assessment assignment considering the age,
size, type of building systems, construction methods, and location of the property. In no event
may the qualifications of the needs assessor and any related consultants employed to prepare
the CNA be less than described in ASTM E 2018-08 Appendix XI.1. The needs assessor (and
any other consultants, specialists or trades contractors engaged for purposes of the needs
assessment) may have no identity-of-interest with the lender or the borrower or its principals,
and may not have any personal or business relationship with the borrower, or its principals that
would create a conflict of interest.
b. Scope of Work, Duties and Responsibilities.
The needs assessor always prepares the CNA for existing improvements in refinancing
transactions. CNAs for new construction or gut rehabilitation proposals may be prepared by
the project architect or by the lender’s construction analyst. Proposals for substantial
rehabilitation but not gut rehabilitation require a CNA for existing improvements, in which
event, the borrower’s project architect may prepare the CNA in lieu of a needs assessor
retained by the lender. Otherwise, CNAs for existing improvements must be prepared by an
independent, third party, needs assessor hired and paid by the lender. On-site physical
inspection including a representative sampling of units is required. Capital needs assessments
must be prepared in accordance with the instructions at Appendix 5G.
C. Energy Professionals.
All applications for insured mortgages must provide verified utility consumption data for energy and
water use, either for a prior 12 month year (no half or partial months) or for the projected 12 month
year following completion (assuming underwritten occupancy). Such verified data must be entered in
Portfolio Manager, a free tool provided by the Environmental Protection Agency (EPA). Properties
with energy scores below a minimum threshold are subject to further requirements to identify utility
conservation measures by means of an ASHRAE Level II energy audit and in some cases
implementation of cost beneficial conservation measures is required. (See Appendix G Section IV for
detailed instructions and exceptions.) The required verification of utility consumption data, and
preparation of an energy audit when necessary, must be by persons with not less than 3 years work
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experience evaluating utility consumption in multifamily buildings and with appropriate professional
certifications or credentials including one or more of the following:
1. Registered architect;
2. Licensed professional engineer;
3. American Energy Engineers Association’s Certified Energy Manager (CEM) or Certified Energy
Auditor (CEA) designations;
4. American Society of Heating, Refrigerating and Air Conditioning Engineers (ASHRAE) High
Performance Building Design Professional (HPBDP) designation;
5. Building Performance Institute (BPI) Multifamily Building Analyst (MFBA) designation;
6. Residential Energy Services Network (RESNET) Home Energy Ratting System (HERS) Rater.
D. Specific Qualifications, Requirements for Other Technical Specialists.
The borrower, the project architect or the lender may require the services of other technical specialists
to inform the preparation or review of plans and specifications. These specialists may include
mechanical, structural, sanitary, geo-technical or civil engineers. When engaged for services, a
principal of the technical specialist firm must be a licensed or registered professional, must sign any
resulting report or opinion and when applicable must affix his/her professional seal.
E. HUD Approval of Qualifications.
The lender should disclose the identity and qualifications of both the borrower’s and its own
architectural and construction consultants, needs assessors, energy professionals or other technical
specialists at times consistent with efficient completion of due diligence and design work but in no
event later than the application for Firm Commitment. HUD reserves the right to examine credentials
and experience and to reject individuals it deems unqualified for a particular assignment. Accordingly
the risk of relying on due diligence or design products prepared by unqualified consultants is borne by
the lender and the borrower.
5.3
Required Design Services and Documentation by Construction
Activity and Program.
A. Required Professional Services by Activity.
The borrower must provide or engage professional design and construction expertise for the
preparation of construction documents as appropriate for proposed construction activity that exceeds
the thresholds described below. Professional design services may be provided by licensed or
registered architects or professional engineers, one of whom must be the principal or lead design
professional with overall responsibility for the preparation of drawings and specifications and related
documents (the construction documents.) This professional is the project architect. The level of
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professional services and the required documentation are determined both by the classification of work
proposed as well as the program for which application is made. The extent of design services and
documentation needed by program and class of work are generally summarized in the following table:
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CLASS OF WORK*
SERVICES AND DOCUMENTS
CNA**
DESIGN
CONSTRUCTION
223(a)(7)
Repairs & Level 1
Alterations not
exceeding routine
maintenance and
<=$1,500 per unit
Required
n/a
List of Immediate
Repairs/Costs, bids for
trade or component
items >$25k,
dimensioned sketches
of accessibility
remedies, and work by
qualified tradesmen
223(f)
Repairs & Level 1
Alterations
<$15,000/unit***
Required
n/a
Same as above
223(f)
Level 2 Alterations or
any repairs and
alterations
=>$15,000/unit***
Required
Project Architect
Itemized
Repairs/Costs,
Dimensioned drawings
of reconfigured
spaces, GC & HUD
2328 needed as
determined by Project
Architect
223(f)
Level 3 Alterations
Required
Project Architect
Itemized
Repairs/Costs,
Dimensioned drawings
of reconfigured
spaces, GC and HUD
2328 required for
Level 3 Alterations
220,221,231,
241(a)
All classes of work
Required
Project Architect
Full drawings and
specifications,
Architect
administration of
work, GC & HUD
2328, Davis-Bacon
wage standard
* More than one class of work may apply to a building or a property. When construction costs are less
than $15,000 per unit, requirements for Level 2 and 3 Alterations apply to the buildings or spaces
where the alterations are proposed (not all buildings or spaces). When Level 2 Alterations are singular
or very limited (e.g., alter a single space or interior, non-bearing wall) professional design services are
not required..
** See Appendix 5G for how CNAs are used by class of work and program.
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*** This $15,000 per unit limit for the cost of all repairs and alterations is only a trigger for when the
borrower must retain a project architect; it is different from the dollar-per- unit threshold for defining
substantial rehabilitation and is not adjusted for the High Cost Factor.
B. Licensing and Insurance for Design Professionals.
1. New Construction, Substantial Rehabilitation.
a. Design professionals providing required design or construction services must be professionally
licensed or registered to render services in the design of buildings by the State in which the
project is to be constructed.
b. Design professionals providing required design and/or construction services must each be
covered by a policy of professional liability, errors and omissions, insurance in an amount
consistent with the risk of loss based on the scope, scale and cost of the product designed.
c. The professional liability insurance policy must be maintained through the twelve month
warranty inspection period that follows Final Endorsement. The professional liability insurance
carrier must have and maintain a rating that is acceptable to HUD (A.M. Best Financial
Strength Rating [FSR] of B+ or better).
d. At initial closing, each design professional must provide their certificate of liability insurance
which must substantially conform to the sample Certificate of Professional Liability Insurance
contained in Appendix 5H.3.
2. Level 3 and/or Level 2 Alterations in Section 223(f) Transactions.
When the services of a project architect are required to address any combination of repairs and
alterations equal to or greater than $15,000 per unit or Level 2 and/or Level 3 Alterations, the
project architect must meet the same licensing and insurance requirements as for substantial
rehabilitation, including the provision of a certificate of liability insurance which must
substantially conform to the sample Certificate of Professional Liability Insurance contained in
Appendix 5H.3. If the project architect is retained to address Level 2 and/or Level 3 alterations
where the cost of all repairs and alterations does not exceed the $15,000 per unit threshold, the
project architect may limit contract responsibilities and liabilities to the specific Level 2
reconfigured spaces or to buildings where the Level 3 Alterations occur. But when costs per unit
equal or exceed $15,000, the project architect’s responsibilities and liabilities apply to all
alterations and repairs.
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C. Evaluation and Selection of Project Architect.
HUD, the borrower and the lender must determine that the project architect is capable and qualified.
1. The lender’s construction analyst:
a. Will review the project architect’s experience in light of the scale, content and construction
technologies required for the project and compare the project architect’s experience to the
nature of the proposed work;
b. Will monitor and review the project architect’s progress on the project and the resulting design
products; and
c. May recommend that the borrower select another professional if the project architect’s past
work experience or current work progress or work product(s) are found to be unacceptable.
2. Failure of the borrower to engage a project architect acceptable to the lender and HUD is a basis
for rejection of the application.
D. Owner-Architect Agreement.
On projects requiring a project architect, an agreement between the project architect and the owner for
architectural services must be executed.
1. The owner must provide and the lender must submit the agreement not later than with the
application for Firm Commitment.
2. For new construction and substantial rehabilitation projects the agreement must be an AIA
Document B108, Standard Form of Agreement between Owner and Architect for Housing Services
and must include the HUD Amendment for Federally Funded or Federally Insured Projects (HUD
92408-M).
a. The scope of services shall provide all architectural, structural, mechanical, electrical, civil,
landscape and interior design and consulting services necessary to prepare drawings,
specifications and other documents setting forth in detail the requirements for construction of
the project. The scope of services shall also provide for administration of the construction
contract.
b. The scope of services must designate the responsibility for the services to be provided, whether
by the project architect, owner or others.
c. Additional Owner-Architect Agreements must be submitted for any part of the basic design
services with more than one prime professional, e.g. for site, civil, mechanical, electrical
engineering services, etc., or supervisory architectural services. The project architect is
responsible for coordinating multiple prime professional contracts.
d. There may be separate agreements for design and construction administration services if the
same project architect is not employed for each (e.g. when the project architect has an identity
of interest with the borrower). When there is a separate agreement for administration of the
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construction contract, it must be submitted for approval before initial endorsement. Where
separate agreements are made, those sections not applicable shall be deleted.
e. The project architect may have an identity of interest with the owner or general contractor, but
in that event cannot administer the construction contract. An identity of interest is defined in
the HUD Amendment.
3. For Section 223(f) transactions that include repairs and alterations exceeding thresholds identified
for levels of work requiring a project architect the Owner-Architect Agreement shall be an AIA
form B104 for projects of limited scope.
a. The agreement must describe the actual services to be provided and include all services that are
necessary to the project.
b. The project architect’s fee must be a fixed sum and may be allocated among specific services.
c. The lender’s construction analyst shall review the agreement to assure that proposed services
are sufficient and clearly defined and that the borrower’s right and power to assign the
agreement to or for the benefit of the lender is not impaired.
d. There is no standard HUD amendment prescribed for the AIA B104.
e. The project architect may be a principal or an employee of the borrower or of an affiliate of the
borrower provided that requirements for professional qualifications, licensing or registration,
and professional liability insurance are met and that the construction documents produced are
not diminished by comparison with what would otherwise be required in the AIA B104 and no
architect’s fee payable to the affiliated principal or employee shall be a mortgageable cost. In
this event, no Owner-Architect agreement would be required but HUD or the lender may
require construction administration by a separate, unaffiliated, qualified design professional
and in that event the AIA B 104 would be executed to retain those services. The borrower
and/or its affiliates must demonstrate an established, successful history of self-performing
architectural design services composed of multiple successful projects comparable to that
proposed.
E. Modification of B108 Owner-Architect Agreement for New Construction and Substantial
Rehabilitation. The document may be changed to reflect the actual agreement between owner and
project architect for the specific project.
1. Generally modifications can be made by striking out inapplicable provisions and inserting
additional provisions in Article 12. Adding directly to a specific provision is also acceptable.
2. Changes by either the project architect or owner, shall not delete any service necessary to the
project, although the responsibility for a required service may be transferred.
a. The document shall provide a clear and definite statement of how responsibility for providing
any required service is to be divided between project architect, owner and others. Documents
must conform to requirements in Section 5.3.D.2 above.
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4.
5.
6.
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b. Required services may not be sublet or delegated to any one not identified to and approved by
HUD.
The project architect’s fee must be a fixed fee for the services provided as stated in the Agreement.
No other method of stating compensation is acceptable. Separate fee amounts for design services
and for construction services must be stated.
Where the project architect’s basic fee exceeds that which may be paid from mortgage proceeds or
where the Owner-Architect Agreement provides for reimbursable expenses (note that reimbursable
expenses may not be paid from mortgage proceeds), the person/entity responsible for such extra fees
must be identified on the HUD Amendment.
HUD shall not be incorporated into any specific provision of the Agreement and the inclusion of
the HUD Amendment in Article 12 (enumeration of Special Terms and Conditions) is sufficient to
incorporate HUD requirements. No modification of the HUD Amendment is permitted.
The lender’s construction analyst must review the agreement for compliance with these
instructions.
F. Architectural Considerations in Industrialized Housing (New Construction). The lender’s construction
analyst must contact the Production Chief of the Multifamily Regional Center or Satellite Office to
approve the use of industrialized (aka “modular”) housing. Architectural and engineering services are
required for off-site construction of housing (modules or panels) and the fees for such services must be
included in the cost of each manufactured unit. The lender’s construction analyst must determine the
acceptability of such services by examining the drawings and specifications. In addition architectural
services are required for on-site construction including site work and a prepared foundation for the
installation on-site of modules or panels constructed off-site. These services are provided by the
project architect.
1. The exhibits for off-site work shall be equal in quality to the typical construction documents
prepared by architects engaged in designing the type of housing proposed and should include the
working drawings and specifications for the typical industrialized housing unit, along with an
assembly or installation plan and manufacturer’s warranty document which must cover not only
off-site construction but also transit and delivery and the efficacy of the on-site assembly or
installation plan.
2. Additional professional services may be required to provide a complete set of construction
documents. These services must be determined by the lender’s construction analyst for each
project based on the percentage of the construction documents for the project that may be provided
by the housing manufacturer. Usually, the project architect will integrate the manufacturer’s
drawings into his/her set of drawings and specifications, adapting them to the particular project.
3. The manufacturer shall provide complete professional design services for the modules or panels to
be used. If these services in combination with those of the project architect meet in all respects the
qualifications and quality required, the construction documents shall be acceptable.
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4. In most states, plans and specifications for industrialized or manufactured housing are preapproved by an authorized state office, agency or building code official with plans for particular
models evidenced by a plan approval number. Inspections and or certifications of factory based
construction typically are managed by states by periodic factory inspections evidenced by stamps
and/or numbered approvals. It is the responsibility of the project architect, reviewed by the lender
construction analyst, to determine that any and all plan approvals have been obtained.
5. Owner-Architect Agreement, AIA Document B108, is required only to cover the services provided
by the project architect and is not required for professional services provided by the housing
manufacturer.
6. In all cases, an independent architect with no identity of interest shall provide general
administration of the construction contract.
5.4
Architectural Standards and Other Criteria
Projects that are built, substantially rehabilitated, acquired or re-financed with FHA mortgage insurance
must meet the standards described in the Appendices to this chapter, as outlined below:
A. Appendix 5A – Common HUD Standards and Criteria
B. Appendix 5B – Accessibility for Persons with Disabilities
C. Appendix 5C – Seismic Resistance and Fire Protection Standards for Existing Buildings
D. Appendix 5D – Energy Codes
E. Appendix 5E – Firm Commitment Drawings and Specifications to be Submitted by the Borrower’s
Architect
F. Appendix 5G– Capital Needs Assessments
5.5
Construction Contracts
New construction and substantial rehabilitation projects always require a general contractor and a HUD
form of contract (HUD 92442-M) and Supplementary Conditions to the Contract for Construction (HUD
92554-M). Section 223(f) transactions with Level 3 Alterations require a general contractor to execute an
owner-contractor agreement covering at a minimum the Level 3 Alterations, if not necessarily all other
repairs and alterations. For 223(f) transactions with any combination of repairs and alterations with costs
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equal to or exceeding $15,000 per unit or with Level 2 Alterations, the project architect shall determine
whether the scope of work requires a general contractor. Whenever a general contractor is engaged, the
owner-contractor agreement must be in writing and in a form acceptable to HUD. Construction contracts
acceptable to HUD are as follows:
A. New construction and substantial rehabilitation. The owner-contractor agreement (the general
contract) shall be HUD form 92442-M with Supplementary Conditions to the Contract for
Construction, HUD form 92554-M. These forms are coordinated with Owner Architect form B108
and the HUD Amendment to the B108 (HUD 92408-M) as well as with other HUD forms referenced
in the Owner Architect and the Owner Contractor agreements. In addition, new construction and
substantial rehabilitation projects require use of the Building and Loan Agreement between the
borrower and the lender (HUD 92441M.).
B. Section 223(f) transactions. The AIA A107 form of Owner Contractor agreement is paired with the
AIA B104 and must be used. Other AIA forms for change orders, requisition of funds and related
processes referenced in these paired agreements should also be used in accordance with the terms of
the agreements.
5.6
Streamlined Processing Instructions For Projects Requiring
Professional Design Services
Streamlined processing of architectural design, specification, construction, and cost estimation exhibits
serves two purposes. The first is to expand use of HUD mortgage insurance programs for projects with
Low Income Housing Tax Credits (LIHTC). The second is to expedite applications for borrower
development teams with clearly demonstrated capacity and experience with HUD insured construction
projects. Streamline processing means that less than 100% complete plans and specifications may be
submitted with the application for Firm Commitment. Proposed final project drawings and specifications
must be submitted for HUD review and comment/approval at least thirty calendar days prior to initial
endorsement. Any HUD comments on the proposed final drawings and specifications must be resolved
and permit ready drawings and specifications (approved by the Building Code Official with jurisdiction,
subject only to the payment of required permit fees and charges) must be delivered not less than ten
calendar days prior to initial endorsement.
A. Applications Eligible for Streamline Processing.
All LIHTC project applications are eligible for streamline processing of design and construction
documents. Other applicants should describe and discuss their qualifications for streamlined
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processing with the MF Regional Center/Satellite Office at the concept meeting or pre- application
stage. To be considered qualified the borrower/sponsor, the project architect, the general contractor, if
any, and due diligence providers, must each have successful prior HUD project experience comparable
in scope and scale to the scope of work proposed in the application. Generally, HUD will determine
eligibility for streamline processing as a result of a concept meeting or pre-application. Applicants for
223(f) without LIHTCs and with repairs and alterations requiring a project architect may request a
concept meeting if they consider deferred submission of final plans and specifications useful.
Otherwise 223(f) applicants should provide final plans and specifications with the application for Firm
Commitment.
B. Other Factors Limiting Streamline Processing for Non-LIHTC Applications.
Lenders and MF Regional Center/Satellite Offices should determine that the project will achieve initial
closing within sixty calendar days after issuance of a Firm Commitment conditioned upon final plan
submission. Lenders and MF Regional Center/Satellite Offices should also consider the complexity of
the proposed design and construction when determining whether to permit the deferred submission of
final drawings and specifications. Complex issues unsuited to streamlined processing include, but are
not limited to:
1. Any claim of exemption from the design and construction requirements of the Fair Housing Act
based on site impracticality (terrain unsuited to accessible paths and building entrances);
2. Projects where costs not attributable to residential use must be calculated because Criteria 4 of the
form HUD 92264A, Statutory Limitations of cost per family unit is material to the calculation of
the maximum mortgage amount;
3. Projects with complex mixed use, commercial use, or use of new, complex construction
technology;
4. Projects with complex environmental remediation issues or with historic preservation objectives.
C. Minimum Construction Documentation at Firm Commitment.
The Firm Commitment may be conditioned on the timely receipt and satisfactory review of complete
and final plans, specifications and cost estimates, provided that the lender’s submission of less than
100% of the drawings, specifications (i.e., schematic/line/working drawings) and cost estimates
provides the following detail:
1. The static footprint of the building or buildings together with proposed site improvements on the
surveyed site plan as well as any proposed easements and/or off-site improvements with survey
detail consistent with the requirements for surveys described in Appendix 5A. ;
2. The gross building and net residential square footage for the project;
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3. Dimensioned unit layouts for each unit type for new construction or substantial rehabilitation or
for reconfigured spaces in Section 223(f);
4. Dimensioned floor plans, and elevations for each building type;
5. Sufficient design detail to determine the Davis-Bacon wage rate classification for new construction
and substantial rehabilitation;
6. Sufficient design detail to determine compliance with accessibility requirements in Appendix 5B;
7. Sufficient design detail (wall cross section details) to determine structural framing and exterior
wall finishes for new construction and gut rehabilitation and other repairs and alterations when
applicable;
8. A summary interior finish schedule identifying proposed interior finishes for units, including
kitchens and baths, as well as for building common spaces and accessory structures;
9. Sufficient design detail to determine building mechanical systems;
10. Sufficient design detail to determine scope of site development and off-site construction;
11. A written cost estimate (HUD-2328) from the general contractor, if any;
12. The lender’s construction analyst’s cost estimate (HUD 92326) for new construction and
substantial rehabilitation or review of repair and alteration costs for Section 223(f);
13. The lender’s review and comparison of the general contractor’s cost estimate with the lender
construction analyst’s estimate on form HUD 92331 for new construction and substantial
rehabilitation;
14. For new construction and substantial rehabilitation (a) the proposed but unsigned owner contractor
agreement for construction (HUD 92442M) indicating any selected options (e.g. incentive
payments, etc.) or special conditions and the Supplemental Conditions (HUD 92554M). For
Section 223(f), the AIA A107, if general contractor is used;
15. Project Architect’s or needs assessor’s CNA reviewed by the lender’s construction analyst with the
lender’s financial plan for funding future capital needs, all in accordance with Appendix 5G;
16. A HUD Custom Statement of Energy Design Intent (for new construction or gut rehabilitation) or
a HUD Custom Statement of Energy Performance (for existing buildings with less than gut
rehabilitation) obtained from the Environmental Protection Agency’s Portfolio Manager
application, verified by the energy professional and attached to the CNA by the lender at
submission as described in Appendix 5G; and
17. For gut rehabilitation, the project architect’s detailed inspection report and work write-up.
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D. Scope of HUD Review and determinations required in order to issue a Firm Commitment:
1. An assessment that the estimated project cost based on the borrower’s or general contractor’
estimate of costs and the lender’s cost estimate and the lender’s comparison of these estimates is
reasonable and in line with comparable HUD project data and is likely accurate within a deviation
of plus or minus 5%;
2. An assessment that the borrower’s and general contractor’s financial capacity to complete the
proposed construction is not materially diminished by an increase in cost of up to 5%;
3. An assessment that the proposed general contractor is acceptable pursuant to existing requirements
(sufficient working capital, experience, etc.); and
4. An assessment that the plans and specifications are in compliance with all applicable requirements
on a preliminary basis, with appropriately qualified certifications executed.
5. The Phase I (ASTM Practice E 1527-13 or most current) environmental site assessment and the
HEROS - form HUD 4128 must contain no significant unresolved environmental issues.
E. A modification must be made to the Firm Commitment for those projects determined to be eligible for
deferred submission of final drawings, specifications and cost estimates. Below is a sample special
condition to be added to the Firm Commitment.
“As an accommodation to the Borrower, this commitment has been issued and based upon
preliminary drawings, instead of the final drawings, specifications and cost estimates. At least 30
days prior to the scheduled date for Initial Endorsement [Endorsement, if pursuant to 223(f)], HUD
must receive the final drawings, specifications and the lender’s architectural/cost review report for
review and approval to ensure consistency of design and cost. In the event that there is a net
cumulative construction cost change of more than 5%, or a change in design concept, this commitment
shall be subject to and conditioned upon the further approval of HUD, to be evidenced in writing.
Based on such review this commitment may be terminated and voided by HUD, or additional
conditions may be imposed, at HUD’s option.”
F. All risks related to deferred submission of construction documents are borne by the lender and the
borrower. HUD will not refund application fees in the event that borrower is unable to provide
acceptable construction documents.
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New Construction, Standard Processingthrough Firm Commitment Application
Concept
Meeting
A. Concept Meeting. When a concept meeting is scheduled, its purpose with respect to design and
construction topics is to establish feasibility and to identify key issues. For this reason the lender
should provide:
1. The name, address, contact information and resume or summary of experience of the project
architect and any other design professional(s), due diligence providers and the general contractor if
known. Of particular importance is the development team’s previous experience with HUD
mortgage insurance programs for new construction.
2. Maps and photographs illustrating the location, boundaries, conditions and features of the site,
noting in particular the location and size of public utilities lines available to serve the site, means
of access and egress, and proximate properties.
3. The borrower’s summary design program or concept prepared after inspection of the site and
preliminary review of existing or proposed zoning, subdivision, and building code requirements.
The summary should characterize the contemplated number, size, and kind of buildings and
dwelling units and should include a conceptual site plan and sketch plans of typical units and
buildings. In particular the summary design program should identify key issues presented by the
site and its environs, such as, but not limited to:
a. Terrain, rock or steep slopes that may require detailed exploration, unusual site costs or result
in any claim of site impracticality exemption from the design and construction accessibility
requirements of the Fair Housing Act;
b. Absence or unavailability of public utilities requiring off site work, unusual public permitting
or development entitlement processes or costs;
c. Insufficient or deficient access and egress due to limitations on existing streets and grades or
lack thereof and/ or adverse traffic patterns or conditions.
4. The lender should describe existing or ongoing needs for site due diligence and provide a plan or
description of how due diligence tasks will be completed, including appropriate sequencing,
coordination of studies, and the identity of prospective providers.
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5. The lender should identify any other contemplated sources of funding that would trigger design
and/or construction requirements and describe such requirements (e.g., any Federal assistance,
such as HOME, will trigger Section 504 and UFAS; state or local assistance, including LIHTCs,
may trigger a state or local agency plan for compliance with Title II of the Americans with
Disabilities Act).
6. The lender should state whether streamlined processing of design and construction documents is
proposed and the reasons such processing is both needed (e.g. use of LIHTCs is expected) and
realistic (e.g. development team is experienced with HUD insured mortgage programs for
construction, has successfully executed physically similar projects, and the site and/or environs
present no complex challenges or prospective delays.).
B. Pre-Application. The lender’s underwriter must have visited and inspected the site, and the lender
must submit the following Pre-application exhibits to HUD:
1. Form HUD-92013, Application for Project Mortgage Insurance.
2. Location map with property clearly defined.
3. Sketch plan of the site showing overall dimensions of main building(s), major site elements, (e.g.
parking lots, points of access and egress, pedestrian access, and accessible entrances and paths.)
and location of existing utilities, (e.g. water, sewer, electric, gas) in the streets adjacent to the site.
Contour lines and elevations are not required in the sketch site plan. However, the lender must
state whether any contours or elevations observed are likely to result in a claim of exemption of
any proposed building or facility from the design and construction requirements for accessibility of
the Fair Housing Act by reason of site impracticality. (See Fair Housing Design Manual 1.38). If
so, the lender must confirm that it has advised the borrower, the design professional(s) and the
general contractor of the site feasibility methodology described in the Fair Housing Act Design
Manual. Similarly, the lender must describe whether and how any design and construction
requirements triggered by other sources of funding will be met.
4. Sketch plans of building(s) that show:
a. Typical floor plans showing apartment types, placement and dimensions;
b. Ground floor plans showing common areas and dimensions;
c. Sketch floor plans of typical dwelling units;
d. Sketch elevations of typical buildings;
e. Residential and gross building area for each building or building type;
f. Typical wall sections showing footing, foundation, and wall and floor structure, with notes
indicating the basic materials to be used in the structure, floor and exterior finishes; and
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g. Anticipated interior finish schedule indicating kind and quality of finishes proposed for units,
including kitchens and baths, as well as building common spaces and accessory structures.
5. The lender must address any physical due diligence issues identified and ongoing due diligence
needed to complete analysis of the site and its environs. If not addressed at a concept meeting, the
lender should provide a description of the studies completed or anticipated and the identity of those
preparing the studies. Completed or proposed due diligence should include investigation of the
physical requirements that may be imposed by any other sources of funding anticipated for the
project.
C. Firm Commitment Application. The lender’s construction analyst must have visited and inspected the
site and its environs, investing time and attention to detail sufficient to allow the analyst to appreciate
due diligence needs and to knowledgeably evaluate prepared due diligence and all design and
construction documents. The lender must submit the following exhibits for review, provided that, if
the application is approved for streamlined processing, the following exhibits may be submitted as
substantially completed drafts and resubmitted as proposed final drafts at least 30 days prior to initial
endorsement (See 5.6 above):
1. Form HUD-92013, Application for Project Mortgage Insurance.
2. Owner-Architect Agreement, AIA Document B108 (and HUD Amendment to the B108), fully
defining the services and fees for each prime design professional with which the borrower/owner
contracts directly. Additional contracts must be submitted for any part of the basic design services
with more than one prime professional, e.g. for site, civil, mechanical, electrical engineering
services, etc., or supervisory architectural services. The project architect shall have the authority
and duty to coordinate multiple prime professional contracts.
3. Completed Surveyor’s Report, Form HUD-91073M, with responses to all questions and the
completed HUD certification. See Appendix 5A.
4. Engineering and specialty reports, e.g. geotechnical, termite control, structural, etc.
5. Municipal and utility company letters of confirmation for the provision of services and/or offsite
improvements.
6. Any documents necessary to establish:
a. Site ingress and egress, utilities service and other general acceptability criteria in MPS 4910.1,
Chapter 2.
b. Binding or signature ready drafts of proposed joint use, access and maintenance agreements
where common use easements (e.g., common driveways) exist or are proposed. When
proposed, easements should be platted and agreements drafted for review in preparation for
recording.
7. Certification from project architect substantially in the form of Appendix 5H.1.
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8. Contract drawings and specifications that conform to the specific format and requirements
described in Appendix 5E.
9. Offsite Construction: Description of all work essential to the project but outside the boundaries of
the property (see Appendix 5E).
10. The general contractor’s Cost Breakdown, form HUD 2328.
11. The lender’s CNA based on construction plans and specifications of the improvements to be built.
Of the following portions of the CNA, the first, (“a”), should be completed by the Project
Architect. The remaining three (“b”, “c”, and “d”) may be completed by the lender’s construction
analyst. The CNA must be completed and submitted using the CNA e Tool in accordance with
Appendix 5G and includes:
a. A HUD Custom Statement of Energy Design Intent (SEDI) from EPA’s Portfolio Manager
based on projected utility consumption for each building to be built. The projection should
assume that the building is constructed in accordance with the plans and specifications. This
projection must be prepared by the project architect or another licensed or certified
professional retained for this purpose and should utilize recognized building energy simulation
methods and tools, e.g., RESNET Home Energy Rating System for low rise construction.
Professional certifications for building energy simulation include the American Society of
Heating, Refrigerating and Air-conditioning Engineers (ASHRAE) Building Energy Modeling
Professional designation and the American Energy Engineers (AEE) Certified Building Energy
Simulation Analyst. The projected whole building utility consumption data resulting from
energy modeling should be reported to Portfolio Manager and the HUD Custom SEDI
obtained. The resulting HUD Custom SEDI must show an energy score not less than the
prescribed minimum. (See Appendix 5G.) Note that the HUD Custom SEDI minimum score
is a requirement in addition to and not in lieu of the obligation to prepare plans and
specifications meeting the requirements of the applicable version of the International Energy
Conservation Code or the ASHRAE standard 90.1. (See Appendix 5D for minimum energy
code requirements.).
b. A completed physical inventory of the property to be built, (that is, description of site,
buildings, units, utility types and rates, components and alternatives in the CNA e Tool).
c. An estimate of replacement cost, as new, for each structure (form HUD 92329, Schedule of
Insurable Values) which cost should in the aggregate be consistent with the lender’s
construction analyst’s estimate of costs for structures including general requirements,
contractor’s overhead and profit.
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d. The lender’s financial plan for funding future capital replacement needs based on actual
expected replacements with appropriate adjustments for inflation and other variables as
described in Appendix 5G. The financial plan will define the schedule of annual deposits to
the Reserve for Replacement escrow.
12. The lender’s construction analyst’s detailed cost estimate package composed of the following:
a. Detailed cost estimate to be reported on Form HUD-92326.
b. A comparison of the general contractor’s trade line item cost estimate (HUD 2328) with the
lender’s construction analyst’s estimate (HUD-92326) with comments and explanations
described on form HUD 92331.
c. The lender’s construction analyst must sign and date the HUD-2328 in the FHA: Processing
Analyst box. The lender’s underwriter must sign and date the HUD-2328 in the FHA: Chief
Cost Branch or Cost Analyst box.
13. The lender’s construction analyst’s completed architectural and cost sections of the form HUD
92264. The analyst must sign and date the form as both “Cost Processor” and “Architectural
Processor.” If different analysts execute the architectural and the cost reviews then each must sign
as appropriate.
14. The lender’s construction analyst’s review and disclosure of identities of interest and application of
the 50%-75% Rule (See Chapter 13, sections 13.16 M and 13.17 for instructions on this Rule.):
a. Identify and describe any identity of interest relationships between or among the Borrower, any
of the Borrower’s design professionals, the general contractor, any subcontractors, material
suppliers, equipment lessors, or manufacturers of industrialized housing.
b. Identify by analysis of the HUD 2328 any single subcontractor that executes 50% or more of
the total construction or any three subcontractors who in the aggregate execute 75% or more of
the total construction measured by dollar value.
15. The proposed but unsigned owner contractor agreement for construction (HUD 92442M)
indicating any selected options (e.g. incentive payments, etc.) or special conditions, the
Supplementary Conditions (HUD 92554M).
16. Review report prepared by lender’s construction analyst who must state that all exhibits are
acceptable without conditions, and that all deficiencies have been acceptably corrected, except that
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in the case of an application approved for streamlined processing, this statement may allow for the
contingency that final plans and specifications have not been completed and that final cost
estimates may vary by up to 5% from the costs estimated in the Firm Commitment application.
The report should address the following:
a. Completeness of construction documents;
b. Conformance to local building codes and HUD standards, including the HUD minimum energy
codes when these exceed local code requirements;
c. Accessibility for persons with disabilities. Refer to the Fair Housing Act design and
construction requirements for accessibility found at 24 CFR 100.205. If the property is
federally assisted, refer also to the Uniform Federal Accessibility Standard. For any public
space at the property (e.g. leasing office, commercial space), refer to Title III of the Americans
with Disabilities Act (See Appendix 5B).
d. Site design:
1)
Placement of buildings, roads, walks and parking on the site;
2)
Identification and review of offsite construction;
3)
Site erosion and storm drainage; and
4)
Soil borings report.
e. Building design:
1) Building circulation:
(a) Adequacy of elevators;
(b) Number and placement of stairs;
(c) Adequacy of lobbies and corridors; and
(d) Adequacy of fire egress.
2)
Typical dwelling units: Adequacy of room sizes and circulation within units.
3)
Fire safety: Provision of adequate fire safety measures, e.g. fire sprinklers, firewalls, fire
doors (if required).
4)
Structural adequacy: Review of building structure and structural details including
measures implemented to address identified hazards such as seismic risk, coastal high
wind and/or flood zones.
5)
Mechanical, electrical and plumbing adequacy: Review of mechanical and electrical and
plumbing plans.
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6)
Energy efficiency. Review utility combination for energy efficiency and determine
acceptability of utility combination. Review and submit the Capital Needs Assessment in
the CNA e Tool per Appendix 5G and confirm that the HUD Custom SEDI shows an
energy score of 60 or better. See Appendix 5D for applicable International Energy
Conservation Code and ASHRAE standards for new construction.
f. Submit copies of the lender’s construction analyst’s project files and logs only if requested by
the HUD Office.
g. Standard certification by lender’s construction analyst(s) (see Chapter 11 Section 11.2).
5.8
Firm Commitment
Construction
through
Initial
Endorsement
–
New
A. Except for projects submitted as streamlined applications, drawings and specifications may be amended by
addendum when the change(s) will have no effect on cost or value. (Final drawings and specifications are
perfected after Firm Commitment in streamline processing.) The lender’s construction analyst must review
the addenda for acceptability as follows:
1) Addenda must clearly state or show the change with specific reference to the location of the
item on the drawings or in the specifications.
2) Amendments shall be clearly noted and dated.
3) Addenda are not to be used to correct errors noted during Firm Commitment processing.
B. Firm commitment reprocessing is required for major changes adding or deleting work representing a
net change of more than 5% of estimated total construction costs, or physical changes that alter
underwritten income and expense so as to reduce the approved mortgage amount by a sum greater than
5% of total construction cost. Drawings and specifications affected must have sheets and pages
revised and replaced.
C. Construction Documents. The lender shall submit the following construction documents to HUD for
review and approval prior to initial endorsement:
1. Final, signature-ready drafts of the Building Loan Agreement, Form HUD-92441M, the
Construction Contract, Form HUD-92442M and the Supplementary Conditions to the construction
contract (HUD 92554M).
a. Assure the correct identification of drawings and specifications on contract forms.
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1) Project name, HUD project number, and project architect’s name.
2) Drawings and specifications by sheets, pages and date or by index with date of last revision
of sheet and page.
3) Addenda, if any, by number and date.
b. Assure compliance with any architectural requirement or condition.
2. Survey and Surveyor’s Report, Form HUD-91073M, which must be reviewed:
a. For compliance with Survey Instructions and Certificate.
b. To confirm that the legal description and survey property boundaries agree.
c. To confirm consistency of the approved plans and site plan with the survey and the description
of any easements, joint use and access agreements, dedications of land for public rights of way,
and state or local subdivision requirements.
3. Contractor’s Estimated Progress Schedule. Article 3.10.1 of the AIA General Conditions requires
the general contractor to prepare and submit an “estimated progress schedule for the work” to the
borrower and project architect. (See instructions for how to prepare the progress schedule in this
Chapter at 5.11.D.5)
a. The borrower or project architect must submit a copy to the lender’s construction analyst at
least 30 days before initial endorsement, and a final copy must be provided with the permitready drawings not later than 10 days prior to endorsement.
b. The lender’s construction analyst must review the schedule to ensure it relates to all the
construction activities required by the construction documents, including dates for the stages of
construction.
Copies of the approved schedule are distributed with other construction documents at initial
endorsement and used to monitor construction progress.
4. Drawings and Specifications. Submit three sets and confirm that:
a. Master Sets No. 1, 2 and 3 are the same as accepted and identified in the Firm Commitment.
(For projects approved for streamlined processing, the lender must confirm that the final plans
and specifications are acceptable, complete and consistent with Firm Commitment exhibits.)
Indicate the total number of pages in the drawings and specifications. HUD may, at its
discretion, eliminate the requirement for set No. 2 (HUD review set).
b. Cover and last drawing sheets, and the first and last specification pages of all sets, are signed
by representatives of the project architect, architect administering the contract, owner,
contractor, lender and bonding company, if any.
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c. Master Set is bound and signed as described above on the cover sheet and last sheet of the
drawings and the first and last pages of the specifications. Signatories must initial opposite any
“last minute” revisions not covered by Firm Commitment or addendum. The master set must
be identified as such.
d. Lender’s signatory is an individual or individuals who are authorized to sign at closing, and
who must sign and initial the plans and specifications (see Appendix 5E). HUD will only
accept the lender’s authorized signatory, who must be identified as such for HUD by the
lender.
5. Drawings and Specifications. Lender must retain one set and confirm that the:
a. Lender set is the same as the set that was accepted and identified in the Firm Commitment (or
approved after Firm Commitment per streamline processing). Indicate the total number of
pages in the drawings and specifications.
b. Cover sheets are signed by representatives of the project architect, architect administering
contract, owner, contractor, lender, and bonding company, if any.
c. Lender set is signed by signatories on the cover sheet and the last sheet of the drawings and the
first and last pages of the specifications. Signatories must initial opposite any “last minute”
minor revisions not covered by Firm Commitment or addendum or as approved per streamline
processing.
D. If construction documents are correct, the HUD senior underwriter will recommend initial
endorsement. In the event of errors or inconsistencies, the construction documents will be returned to
the lender for correction and resubmission.
E. Distribution of Drawings and Specifications.
1. After initial endorsement, HUD will distribute the drawings and specifications as follows:
a. Set No. 1, Master Set, is the legal contract document. HUD will:
1)
Retain this set until the last guarantee inspection.
(a) Add a copy of each change order, form HUD-92437.
(b) Add a copy of each architect’s supplemental instruction.
2)
Package the specifications in a tightly rolled bundle with drawings on the outside,
attach a memo indicating the HUD project number, and send it to the Regional Federal
Records Center one year after completion of construction.
b. Set No. 2 is the HUD Office’s review set.
1)
HUD staff will use this set for processing change orders, review of inspections and
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similar functions.
2)
Dispose of this set after final endorsement.
c. Set No. 3 is the HUD office’s job site set.
1)
The HUD inspector will use this set for inspection of the project.
2)
The HUD inspector will conform this set to the contractor’s “record set.” (The
Contractor is required to maintain at the site a record set for the Owner.)
3)
The HUD inspector will return this set to the HUD office upon completion of
construction. This set is the HUD “as-built” set.
4)
Use this set for guarantee inspections.
5)
Send the “as-built” set to the HUD Regional Center/Satellite Office Director, one year
after completion of construction, for use in loan servicing.
2. Drawings and specifications to be maintained by the lender (the lender set):
a. The lender must maintain this set for a period of three years after final endorsement.
1)
2)
Add a copy of each change order, form HUD-92437.
Add a copy of each architect’s supplemental instruction(s).
b. If the originating lender will not administer the construction contract, the construction
administering lender must forward copies of each change order and architect’s supplemental
instruction to the originating lender for inclusion in the lender set.
F. Early Start of Construction. Construction may not start before initial endorsement and recordation of
the insured mortgage, except with the prior approval of the Director of the MF Regional
Center/Satellite Office. Generally, work performed after receipt by HUD of the initial application but
before initial endorsement constitutes an early start of construction. Some work such as clearing,
grading, minor demolition, environmental remediation or other minor preliminary work may or may
not constitute an early start of construction; (e.g. site improvements or grading on a separate, adjacent
site might result in necessary adjustments to surface drainage or grades on a subject site and might be
permissible; or utilities serving multiple proximate parcels might require installation of a main across a
subject site, and such work might be permissible.) HUD staff must confirm this work during the
review stage of the application and the MF Regional Center/Satellite Office Director may approve.
No work shall proceed without the borrower obtaining and evidencing all state or local approvals or
permits requisite for that work.
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The following are mandatory conditions for approval of an early start of construction:
1. Firm Commitment. There must be a valid outstanding Firm Commitment, including:
a. Site control, and the right to legally access the site for purposes of construction.
b. HUD-approved set of contract drawings and specifications on file. See Appendix 5E for
required Firm Commitment contract drawings and specifications.
c. Required construction contract and other construction documents, including, but not limited to:
1) Construction contract, form HUD-92442M;
2) Supplementary conditions of the contract for construction, form HUD-92554M;
3) applicable Davis-Bacon wage decision (supplied by HUD Labor Standards and
Enforcement);
2. Assurance of Completion for On-Site and Off-Site Work. The early start may not hamper the
ability of the borrower to obtain a title policy when the loan goes to initial closing.
3. Valid Basis for Early Start. The MF Regional Center/Satellite Office Director must document the
file including the reason for granting an early start, after determining that:
a.
b.
c.
d.
e.
An immediate closing is not practical.
There is reasonable evidence and assurance that closing will occur in the near future.
There is a compelling need to start construction before the anticipated closing date.
An early start of construction will not be detrimental to HUD’s interests.
HUD has no insurance obligation or liability whatsoever for costs incurred during an early start
if the project does not reach initial endorsement.
4. The contractor, borrower and lender must execute Form HUD-92415, Request for Permission to
Commence Construction Prior to Initial Endorsement for Mortgage Insurance, without change.
The MF Regional Center/Satellite Office Director must sign form HUD-92415.
5. Preconstruction conference must be held before the start of any construction (see Chapter 12
Section 12.2).
6. Violations of early start criteria must be referred to the MF Regional Center/Satellite Office
Director for a determination as to whether the project may proceed to initial endorsement.
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Substantial Rehabilitation, Standard
Meeting through Initial Endorsement
Processing-
Concept
All of the previous instructions for standard processing of applications for new construction (Sections 5.7
and 5.8 of this Chapter) apply to substantial rehabilitation projects except as modified here.
A. Concept Meeting. The concept meeting is an important opportunity to describe and determine the
expected scope of work for existing properties, which may range from gut rehabilitation to more
limited repairs and alterations that meet the thresholds for substantial rehabilitation as described in this
Chapter 5.1.D. Existing properties with a lesser scope of construction activity should be processed
under Section 223(f).
1. The class of work will determine whether a CNA is used to define the scope of work or merely to
describe the as-built result of a scope of work elsewhere defined. (See Appendix 5G, Section
III.A.2.) A key result of the concept meeting should be consensus on the methods and the
identity/qualifications of professionals that will be used to evaluate the existing buildings and
define the scope of work. Note also that methods for verifying utility consumption will differ
depending on the class of work. (See Appendix 5G, Section IV.A.) For gut rehabilitation, the
CNA and utility consumption verification will be prospective and based on design plans and
specifications similar to CNAs prepared for new construction. But for lesser scopes of work, these
items will be retrospective based on existing conditions and will be used to inform the preparation
of the scope of work. In the latter instance, when the energy score reported for the property is less
than the prescribed minimum, the CNA must include an ASHRAE Level II Energy Audit. The
lender and project architect must describe a process consistent with Appendix 5G and a timeline
for evaluating the existing buildings and developing the scope of work and supporting due
diligence.
2. Seismic Threshold for Retro-Fit Analyses. Appendix 5C defines a step by step process for
determining whether seismic conditions warrant further analyses of existing buildings in
accordance with the most recent standards of the American Society of Civil Engineers (ASCE).
The threshold is easily determined, requires no on-site analysis or observation of buildings or sites
and should be provided at the concept meeting to indicate whether seismic analyses are required.
(The CNA e Tool requires a determination of these same threshold values.)
3. Other Due Diligence Studies or Reports. The lender should describe the existing or expected due
diligence analyses including lead based paint inspection for buildings constructed prior to January
1, 1978, buildings with asbestos materials and any other known or reasonably anticipated hazards.
(See Chapter 9)
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B. Pre-application. The lender’s exhibits for pre-application are the same as those for new construction
with these additional items or considerations:
1. Due Diligence and Design Work Plan.
The lender should prepare and submit a concise but definitive work plan for the preparation of
detailed plans, specifications and cost estimates including whether existing conditions will be
evaluated by means of the CNA under the supervision of the project architect or by the project
architect’s detailed inspection of the property.
a. Substantial Rehabilitation Less than Gut Rehab.
A CNA must be used to evaluate existing structures when the scope of work is less than gut
rehabilitation. In such cases, the list of immediate repairs generated by the CNA e Tool is the
project architect’s detailed work write-up. This may be prepared in the CNA e Tool by the
project architect, by a needs assessor retained by the project architect, or by the lender’s needs
assessor/construction analyst. (However, a needs assessor retained by the project architect may
not act as the lender’s construction analyst in the same transaction.)
b. Intended Refinances Found to be Substantial Rehabilitation.
In cases where an intended refinance application is found to be substantial rehabilitation by
reason of the required scope of work discovered through a CNA, the project architect should
review the CNA and should also conduct a detailed inspection, after which the CNA must be
updated as required to reflect any modified or additional repairs and alterations prescribed by
the project architect. In this event the lender’s needs assessor may also act as the lender’s
construction analyst and may update the initial CNA to reflect the project architect’s modified
or additional repairs.
c. Gut Rehabilitation.
When gut rehabilitation is contemplated, the CNA should be completed after the preparation
of, and based upon, plans and specifications as if for new construction (See this Chapter 5.7,
subsection C, paragraph 12 and Appendix 5G). The work plan should identify the due
diligence professionals to be engaged and describe their qualifications. The composition of the
due diligence team should address the issues foreseeable based on the borrower’s objectives
and the project architect’s and the lender’s observations during a preliminary inspection of the
property. The results of any more advanced due diligence agreed upon at the concept meeting
(e.g., a joint inspection by the design team) should inform the pre-application.
2. Joint Inspection.
Past practice has relied upon joint inspections by HUD staff and the project design team to assess
existing conditions. This was necessary in part because CNAs were not prepared for or used in
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most substantial rehabilitation applications. Such assessments are now integrated into the process
for defining the scope of work for rehabilitation. Accordingly, the purpose of the joint inspection
is as follows:
a. To ensure that HUD staff, the lender’s underwriter and construction analyst, and the project
architect, engineer and general contractor have a common understanding of physical conditions
at the site. It is useful for the local Building Code Official or his or her representative to be
present, particularly in the case of older properties characterized by building methods or
technologies no longer commonly used in construction or with buildings that lack life safety
and fire suppression measures or adequate means of emergency ingress/egress. Often a HUD
representative will not be able to attend, in which case the lender should provide annotated
photography and notes of conditions observed. Such information may also be communicated
with attachments in the CNA e Tool if the CNA has already been prepared.
b. To ensure that all due diligence inquiry and physical investigation needs have or will be
identified and addressed, and/or to assist in achieving consensus (or confirming an existing
consensus) on methods and procedures to be used to evaluate conditions and prepare the
rehabilitation scope of work.
c. The joint inspection should be arranged by the lender, attended by the lender or the lender’s
representative, and documented by the lender with minutes and conclusions distributed in
writing to all participants.
d. The joint inspection should be scheduled as early as feasible and may follow the concept
meeting. If not scheduled prior to the pre-application, it must be scheduled promptly following
the pre-application and before the execution of further due diligence or design work.
e. Except for LIHTC projects, a decision on any request for streamlined processing should be
made only after the joint inspection, or subject to the completion of the joint inspection.
3. Substantial Rehab and Requests for Streamlined Processing.
Given the more contingent and variable circumstances typical of work with existing buildings (by
contrast with new construction), any borrower or lender request for streamlined processing for
substantial rehabilitation (other than LIHTC projects) must include documentation demonstrating
prior experience and capacity in properties of similar scale, condition and building technologies
employed. This demonstration should be made for each participant: sponsor, project architect and
design consultants, needs assessor and any due diligence consultants, general contractor and the
lender’s construction analyst.
4. Sketch plans of the existing building(s) “as-is” should be provided with the pre-application.
5. The lender should determine the year built for each building and whether each building was built
for first occupancy after March 13, 1991 using dates of occupancy permits and building permits
when any doubt exists. (If a CNA is prepared, the CNA e Tool will require the needs assessor to
obtain and supply this information.) If first occupied after March 13, 1991, each such building
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must conform to the design and construction requirements of the Fair Housing Act (42 USC
3604(f)(3)(C), and 24 CFR 100.205). See Appendix 5B.
6. The lender must determine whether the property is proposed to be or ever has been Federally
assisted. (The CNA e Tool requires this information.) If so, the property must conform to the
Uniform Federal Accessibility Standards and the requirements of 24 CFR 8.23, 8.26, 8.31, and
8.32. See Appendix 5B.
7. Preliminary Work Write-up: The lender should describe or provide the project architect’s
description of the proposed rehabilitation (from preliminary inspection of the property conducted
by the project architect), including post-rehabilitation sketch plans. The preliminary work write-up
may precede the project architect’s detailed inspection and the detailed work write-up and/or the
CNA. If a CNA has already been prepared, the list of immediate repairs generated by the CNA e
Tool can be the preliminary work write up.
8. The lender should provide lead based paint (LBP) test reports for projects constructed prior to
January 1, 1978, and asbestos report (see LBP and asbestos standards in Chapter 9). Delivery of
these due diligence items may be deferred until Firm Commitment if consistent with and scheduled
as part of an agreed work plan for due diligence.
C. Firm Commitment Application. The lender shall submit final plans, drawings, specifications and
costs analyses and unsigned contract agreements similar to applications for new construction except as
follows:
1. Form of Drawings and Specifications Matched to Scope of Work.
The borrower’s architectural/engineering and cost exhibits for substantial rehabilitation must be
based on due diligence studies and examination of existing conditions. Because existing conditions
vary widely, the extent and form of drawings and specifications will also vary. When a CNA is
used to develop the scope of work, and only limited drawings are required to describe
reconfiguration of selected spaces, or shop drawings are used detailing selected items (e.g. window
and door replacement/installation or new or closed openings, kitchen or bath plans or similar Level
2 Alterations), these drawings should be attached to the CNA when it is submitted; and the
component alternatives form of the Assessment tool should be used to provide detailed
specifications. Alternatively, detailed specifications may be prepared separately, keyed to
alternative components selected in the CNA e Tool, and this specification document attached to the
CNA at submission. Documents prepared in the CNA e Tool or attached to the CNA may be
printed in the requisite sets and copies for signature and distribution at initial endorsement.
For gut rehabilitation, plans and specifications should be prepared and submitted in the same
manner as for new construction.
2. Lender Construction Analyst’s Review Report.
When less than full construction drawings and specifications are prepared, the construction analyst
should specifically determine whether the scope of work is described adequately with a level of
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detail which describes measurable quantities, specified quality or performance standards, precise
locations of work and is both actionable and amenable to inspection of completed work. The
review report should confirm that the documents address the existing conditions.
Building and Unit Areas and Counts.
Building and unit area and unit count breakdowns for structures as well as project totals will be
recorded in the CNA and a summary table may be printed for use with other design documents
attached to the CNA for substantial rehabilitation projects less than gut rehabilitation. For gut
rehabilitation, the schedule (table) of buildings and units should appear in the drawings prepared
by the project architect in accordance with Appendix 5E; these counts and areas should be entered
in the CNA when it is prepared pursuant to the drawings and specifications prepared for gut
rehabilitation. An approved CNA prepared in the CNA e Tool creates a permanent record of this
information.
Operation and Maintenance Plans.
For projects that contain lead based paint (LBP), asbestos, or have ongoing risks such as radon that
may require permanent installation of ventilation, detection or alarm devices, the borrower or
project architect is responsible for engaging the services of qualified abatement contractor(s) to
prepare a scope of work for the abatement or mitigation. Where the scope of abatement work
consists of permanent enclosure or encapsulation or ongoing monitoring, but not removal, a
qualified consultant or abatement contractor(s) must also prepare, separate from the scope of
abatement work, an Operations and Maintenance (O&M) Plan. The O&M Plan must describe
ongoing maintenance procedures to be followed for as long as the hazard remains in place. All
abatement work and ongoing maintenance activities for radon, LBP, asbestos, and/or any other
hazards shall conform to the requirements described in Chapter 9. At the time the CNA is
submitted in the CNA e Tool, any O&M plans should be attached with the submission.
A condition shall be attached to the Firm Commitment requiring that the borrower operate and
maintain the property consistent with the referenced O&M plan(s) for the duration of the insured
mortgage.
Submission of Due Diligence Reports.
When the CNA e Tool is used to prepare and document the scope of work, due diligence,
engineering, energy audit and related studies, and reports which otherwise might be submitted as
part of a paper application package, should be attached to the CNA when it is submitted.
Davis-Bacon Wage Standards and the CNA e Tool.
When the CNA is used to develop the scope of work, costs of repairs are itemized in the CNA e
Tool. However, Davis-Bacon wage decisions are not used in these estimates, as this could distort
estimates of future replacement costs which are not subject to wage decisions. Accordingly, the
summation of costs in the standard trade breakdown and general contractors estimate (HUD 2328)
should estimate and restate the cost of proposed repairs and alterations based on the contractor’s
use of the prevailing wage decision. The lender’s construction analyst’s detailed estimate (HUD92326) and comparison of estimates (HUD-92331), together with the architectural and cost
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portions of the HUD 92264 signed by the construction analyst, should also reflect use of the
prevailing wage decision. When completed, these HUD forms should be attached to the CNA for
submission by the lender. Note also that the two estimates of costs are formatted differently: the
CNA e Tool organizes costs by component, which may be sorted by ASTM category as reflected
in the Standard Table of Estimated Useful Life. This provides a form of trade based categorization
but is not the same as the HUD 2328 and related forms which report costs by CSI’s trade-based
categories.
7. Project Architect’s Certification.
For applications proposing substantial rehabilitation and not gut rehabilitation, the project
architect’s certification (Appendix 5H.1) should be attached to the CNA at the time it is submitted
(or resubmitted) in the CNA e Tool.
8. For gut rehabilitation when the CNA is prepared based on plans and specifications to be built (as
for new construction), the construction documents, project architect’s certification, due diligence,
engineering and related studies, if any, and the lender construction analyst’s cost package are
submitted in the same manner as for new construction.
9. When the property will be rehabilitated, consultation with the State Historic Preservation Officer
(SHPO) is required as part of HUD’s determination of whether the property is a historic property
or is in a designated historic district, and whether there will be adverse effects to a historic
property. The SHPO consultation must be completed no later than the submission of an
application for Firm Commitment. (See Chapter 9).
D. Firm Commitment to Initial Endorsement.
After Firm Commitment and not later than 30 days prior to initial endorsement, the lender must
assemble the final, printed plans, drawings, specifications, construction schedule, and contract forms.
Even if such documents were submitted as attachments to the CNA e Tool, or otherwise electronically
submitted, they must still be printed, and signed in the requisite number of counterparts as described in
Section 5.8 and confirmed as sufficient, authentic and final documents for contract purposes.
5.10
Processing for Refinance or Acquisition, Section 223(f) and
223(a)(7) and 241(a) for Repairs and Alterations
The previous instructions in this chapter apply to projects insured pursuant to Section 223(f) and 223(a)(7)
and Section 241(a) supplemental loans for repairs and alterations, except as modified below.
A. Architectural Standards. Eligible properties are existing buildings, and the criteria for acceptance are
not the same as for proposed construction. See Appendix 5 for architectural standards for existing
buildings.
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B. Limitation on Repairs for 223(a)(7). The intent of the 223(a)(7) program is to provide a simple, quick
refinance option for existing insured properties to improve cash flow by lowering the interest rate or
extending the amortization period, reduce the risks of default and improve overall financial
performance. Accordingly, repairs that reconfigure space are not permitted except for limited
dimensional changes as remedies for accessibility deficiencies. In terms of the classification of work,
activity is limited to repairs and Level 1 Alterations (excepting accessibility deficiency items as
noted.) Moreover, no environmental review is intended for 223(a)(7) applications, and so repairs and
alterations are further limited to those considered to be routine maintenance. (See Chapter 9.1
Subsection A, paragraph 5.) The total cost of repairs and alterations (excluding the costs of remedies
for life safety or accessibility deficiencies) may not exceed $1,500 per unit.
C. Neither concept meetings nor pre-applications are needed for 223(a)(7) applications and are not
required for 223(f) applications, so Firm Commitment applications may be submitted directly to HUD
for review. A concept meeting may be advisable for 223(f) applications where expected Repairs,
Level 1 and Level 2 Alterations (or Level 3 Alterations in some buildings) are significant and may
approach or exceed the threshold definition of substantial rehabilitation (See 5.1.D). In that event, the
purpose of the concept meeting is to determine the scope of work, or to establish agreed upon due
diligence that will determine the scope of work.
D. A CNA based on existing conditions is required for all applications. The lender must retain a
qualified needs assessor who must complete the assessment in accordance with Appendix 5G not
earlier than 180 days prior to the application for Firm Commitment, provided that in the case of
223(a)(7) applications a CNA may be accepted if:
1. It is dated not more than 2 years prior to the date of application for Firm Commitment;
2. The MF Regional Center/Satellite Office Director approves the use of the existing CNA for
purposes of the application;
3. The CNA contents and scope conform to the requirements of Mortgagee Letter 2012-25 in lieu of
Appendix 5G and use of the CNA e Tool for its preparation and submission; and
4. The mortgagor and lender are required to provide a new CNA not later than 10 years after the date
of the CNA accepted with the application.
E. Stale Needs Assessments. In the event that the lender fails to submit an acceptable application for
Firm Commitment within 180 days from the date of the CNA, HUD will return the CNA to the lender
and the lender must order an updated CNA. The needs assessor must re-inspect the subject property,
updating any structure and/or site conditions observed, and submit the new CNA in the CNA e Tool.
F. By submission of the CNA through the CNA e Tool, the lender certifies that it has selected a qualified
needs assessor with no conflicts of interest in the transaction and has reviewed the assessment for
completeness, accuracy, reasonableness and conformance to HUD requirements. (See Appendix 5G
for certification language.)
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G. Other required architectural/engineering/cost exhibits which the lender must attach to the CNA at
submission are:
1. A completed A/E portion of Form HUD-92264.
2. Certificate of Occupancy or Final Inspection Report, if available, or a statement from the
jurisdiction with building and/or zoning code enforcement authority recognizing any legal nonconforming use.
3. Municipal Code Violation Report/Clear Report, and Fire Marshall’s Report/Clear report.
4. City/County Health Officer’s report/clear report where private water supply or sewage treatment
systems are involved.
5. Location map.
6. Aerial photograph or satellite view of site.
7. Set of as built plans, if available, which, if not already digital, should be converted to digital files
and saved as Portable Document Format (pdf) files.
8. Annotated photography and other physical due diligence reports as needed based on observed
conditions, in accordance with Appendix 5G
9. Any O&M plans in use or proposed for use at the property.
10. If a project architect has been retained, attach the following:
a. The owner architect agreement, AIA B104;
b. The project architect’s certification for a refinancing transaction substantially in the form of
Appendix 5H.2; and
c. Any drawings or sketches describing reconfigured spaces and/or altered site improvements
with each clearly labeled to identify the building(s), unit(s), space(s) or improvements where
the reconfigured space or altered site improvements are proposed.
11. If a general contractor has been retained, the lender must ensure that the needs
assessor/construction analyst has reviewed the general contractor’s cost estimate in light of the
estimated cost of immediate repairs forecasted by the CNA and that the two estimates are
reconciled and brought into agreement. The lender should attach the following when submitting
the CNA:
a. The owner-contractor agreement, AIA A107;
b. The contractor's cost breakdown, HUD form 2328; and
c. The contractor’s schedule for the proposed work, which should be reflected in the CNA by
entering a number of months in the “Time to Complete” cell of the “Repair Replace
Recommendation” form of the CNA e Tool assessment file. (See Appendix 5G, Section V)
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H. Form HUD 92013 must be completed and submitted with the application for Firm Commitment.
I. An ALTA/ASCM Land Title Survey, and Form HUD-91073M, Surveyor’s Report; and Title Report.
For specific survey requirements, see Appendix 5A, Subsection G.
J. Maximum Time for Completion of Repairs. Appendix 5G and the CNA e Tool require that all repairs
and alterations be identified as either critical or non-critical. Critical repairs are identified as either
Life Safety or Accessibility. Those identified as “Life Safety” are needed to address hazards to life and
health while those identified as “Accessibility” are needed to correct accessibility deficiencies. While
these are not mutually exclusive, only one designation may be applied to each repair or alteration. All
other repairs and alterations are non-critical repairs.
Life Safety repairs must be completed prior to Endorsement.
Accessibility repairs must be completed as soon as possible; and the CNA e Tool requires that the time
estimated to complete each accessibility repair be identified as a number of months. If “as soon as”
possible exceeds twelve months for any Accessibility repair, the corrective action plan must be
referred to HUD headquarters to the attention of the Director of Technical Support in the Office of
Multifamily Housing Production, who will determine whether the proposed corrective action plan is
acceptable.
Non-critical repairs must be promptly and timely executed and completed within twelve months of
endorsement, provided that the MF Regional Center/Satellite Office Director may approve an
extended period not to exceed six additional months for unusual circumstances (e.g. work constrained
by weather conditions or work requiring temporary relocation of elderly or disabled tenants.). A
program of repairs and alterations which because of scale or quantity is reasonably expected to require
more than a year to complete should be reconsidered as substantial rehabilitation.
K. If proposed repairs or alterations require occupancy or cash flow disruption, the lender should estimate
such losses by month and add the aggregate total to an operating deficit escrow, not the repair escrow.
L. Funding Repairs, Escrow Agreement for Deferred Repairs (Form HUD-92476.1M) See this Form,
Chapter 8 Section 8.11.A.2.c and Chapter 12 Section 12.17.A for greater detail on these provisions.
1. The costs of the deferred repairs (including materials, labor, permits, profits, etc., trended to the start of
repairs) must be estimated and withheld in cash from mortgage proceeds and placed in escrow. In
this context, deferred repairs includes all immediate repairs identified in the CNA that are
proposed for completion after endorsement, including both non-critical repairs and any
accessibility remedies that cannot be completed prior to endorsement. A letter of credit may not be
substituted for this escrow.
2. An additional cash amount (or letter of credit, at the option of the lender) of not less than 20
percent of the repair cost estimate will also be placed in escrow as assurance of completion of
deferred repairs, provided however, that;
a. For 223(a)(7) transactions the additional amount shall be 10% of the repair cost; and,
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b. The additional deposit may be reduced to 10% of cost for any repairs and alterations where:
i. a design professional has prepared construction drawings, and the borrower has engaged a
non-identity of interest general contractor to execute the work per a form of contract acceptable
to HUD; and
ii. the contract provides for the withholding of retainage in the amount of 10% of the value of
work completed.
3. The lender may release funds from the mortgage proceeds portion of the escrow in proportion of
the cost of work completed consistent with HUD’s instructions for disbursements from repair
escrows. See Chapter 12 Section 17.
4. Funds remaining in the escrow may be released to borrower when:
a. All repairs have been satisfactorily completed as determined by HUD;
b.
Evidence of clear title has been provided to HUD; and
c. In cases where the cost of repairs and alterations exceeds $400,000, the borrower (or the
general contractor in cases where a construction contract was executed) has provided latent
defect assurance in the form of an escrow in cash or letter of credit or surety bond (at the
option of the lender) equal to 2½% (or a greater percentage as warranted) of the repair cost, to
be maintained for fifteen months from completion of repairs. See paragraphs 8 and 9 of HUD92476.1M for further details.
5. Except in the case of existing insured projects, where the current balance in the Reserve for
Replacement escrow may exceed the initial deposit otherwise required to provide a balanced
financial plan for future capital replacement needs, funds deposited in the Reserve for
Replacement escrow account at or after endorsement shall not be used for the completion of any
immediate repairs and alterations.
M. Withholding of Excess Proceeds. In cases where completion of repairs is deferred and the mortgage
amount exceeds the costs of refinancing and all required costs, including repairs (“cash out
transactions”), the lender shall withhold 50% of the excess proceeds until all repairs and alterations are
completed in a manner acceptable to the lender and HUD. The withheld funds will be added to the
repair escrow. (See Chapter 8 for detailed escrow release instructions).
N. Completion of Repairs and Alterations.
1. If the borrower has not completed all repairs by the end of the repair period (including any HUD
approved extensions), the lender will complete the repairs using the escrowed funds (but only to the
extent of such funds) and will provide the borrower with a breakdown of these repairs and the cost(s) of
completion (including administrative expenses). Funds remaining in the escrow account after completion
of the repair work will be returned to the borrower less reasonable administrative costs incurred in
completing the repairs.
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2. Requirements after Completion of Repairs. In cases where all or a portion of the costs of repairs and
alterations are required to support the loan amount and actual costs are less than estimated, the
maximum insurable loan amount must be recalculated. If the maximum insurable mortgage is reduced
due to lower actual costs, the borrower must use the excess proceeds for one or more of the following
purposes:
a. Additional repairs approved by HUD and the lender; and/or
b. Prepayment of the mortgage in amounts equal to the scheduled monthly principal payments, with
any remainder going to the Reserve for Replacements.
5.11
Cost Estimating for Lenders
Evaluating the estimates of construction cost prepared by the borrower, project architect, general
contractor, needs assessor and/or construction analyst is a critical element of the lender’s underwriting
task. It is the lender’s responsibility to assure that the borrower and third party professionals have
developed and described costs in accordance with this Chapter 5. For new construction and substantial
rehabilitation projects under Sections 220 and 221(d)(4) and 241(a) supplemental loans, replacement cost
is one of the criteria used to determine the insured mortgage amount. In value-based programs, Section
231 and Section 223(f), replacement cost is a significant consideration in valuation, (except for properties
10 or more years old). Cost estimating consists of estimates of the construction costs for proposed
improvements and/or repair and alteration costs for existing improvements.
A. Method of Estimation.
1. New Construction and Substantial Rehabilitation. The method should be similar to that used by
general contractors. For new construction and substantial rehabilitation, data should be organized
by trade division using the Construction Specification Institute (CSI) Format, then adjusted to
reflect cost differences due to time, location, and price fluctuations. (HUD forms reflect the sixteen
division CSI format that was replaced in 2004 by an expanded, though comparable, format of fifty
divisions.) The cost estimate may be prepared using a quantity takeoff or a square-foot and perunit cost approach using established data and making adjustments.
The cost of repairs and alterations in substantial rehabilitation (less than gut rehabilitation) projects
should be developed in the CNA e Tool but should be restated on HUD 92326 so as to compare
estimated costs with the general contractor’s HUD 2328 and so as to include consideration of the
required prevailing wage decision.
By contrast, in gut rehabilitation, the general contractor’s HUD 2328 costs (and/or the construction
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analyst’s HUD 92326 cost) should be developed independently.
2. Repairs and Alterations Less than Substantial Rehabilitation. Needs assessors and lender
construction analysts should develop and document costs in the CNA e Tool, estimating costs for
each repair and component replaced or added new.
3. Replacement Cost and Insurable Values. For casualty insurance purposes insurable values by
building must be estimated assuming the task of reconstructing the building if it is destroyed, i.e.
for the cost of replacing the building as if new (not restoring the structure as it was originally built
using obsolete methods and materials.) Accordingly, for all existing structures replacement cost as
if new (notwithstanding its condition) should be estimated for each building on a “per square foot”
basis. This figure should be entered in the CNA on the Buildings Form. For new construction,
estimated costs are “as if new” and so total estimated costs of buildings, (not site improvements)
including soft costs and fees should be converted to a “per square foot” figure for each building
and entered in the CNA on the Buildings Form. (See Appendix 5G, Section V).
B. Data. The data source(s) used to prepare cost estimates must be documented. Acceptable cost data
may come from completed comparable projects, benchmark amounts taken from actual project costs,
and published data from construction cost data publishers. The CNA e Tool requires that replacement
cost estimates briefly describe data sources/methods.
C. Detailed Cost Estimates. The lender’s construction analyst should use detailed plans and
specifications supplied by the project architect and/or the needs assessor in the CNA as a basis for the
cost estimate. Estimates must reflect the general level of construction costs in the locality where
construction takes place. Costs must be projected to the midpoint of the estimated construction period.
Davis-Bacon labor wage rates must be used for new construction and substantial rehabilitation. It is
the lender’s responsibility to obtain current Davis-Bacon wage rates from HUD and to assure that the
project design team and general contractor are provided with the relevant and most recent, applicable
wage decisions. For new construction and substantial rehabilitation, the cost estimate is tabulated on
Form HUD-92326, and totals are reported in Sections G, M, and O of Form HUD-92264.
D. Categories of Cost.
The cost estimate consists of the following items:
1. Structures and Land Improvements include:
a. Dwelling structures. Costs of all residential buildings including footings and foundations.
b. Garages include all covered parking, from individual carports to complete parking structures.
For new construction and substantial rehabilitation, include free-standing garage structures
with other accessory buildings on the Accessory Structures line on Form HUD-92326.
Garages are reported separately on Line G.39 on Form HUD-92264 except when the garage
space is an integral portion of a larger structure; in which case individual trade costs should be
reported for the entire structure and not separately for the parking element. Similarly, costs
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should not be separated when accessory uses or commercial space is included as part of a
larger dwelling structure.
c. Parking and the CNA e Tool. Surface parking, including carports, are treated as site
improvements for estimates developed in the CNA e Tool. In a building designed exclusively
for parking (or if parking is a use of space in a larger building with other uses), all enclosed
(garage) parking is treated as a common space even if spaces can be or are assigned to
particular tenants. In some building configurations (e.g. attached townhouses) garages may be
part of a dwelling unit and available only to a resident of that unit. Such garages are called “in
unit” garages and the square foot area of such “in unit” garages is included in the area of the
unit. “In unit” garages are not common space. Replacement cost is estimated for each building
including all the uses of space in the building.
d. Onsite land improvements make up the following trade line items on Form HUD-92326:
Earthwork, Site Utilities, Roads and Walks, Site Improvements, Lawns and Planting, and
Unusual Site Conditions. In the CNA e Tool onsite land improvements are identified as the
need category “site systems.”
e. In new construction and sometimes in substantial rehabilitation, unusual land improvements
may be required to address conditions not typical to most construction in the locality (e.g.
excessive excavation, rock excavation, cuts and fills, special foundations, high water table,
problem soils, environmental remediation work or installations). These items are taken from
the Unusual Site Conditions trade line item on Form HUD-92326, and are reported separately
on Line G.36a of Form HUD-92264. They must be itemized separately because of their
possible impact on site value. The lender’s construction analyst should consult with the
lender’s underwriter and appraiser to define and quantify the need for unusual land or site
improvements.
f. Short extensions or connections of roads, walks, and utilities from project site boundaries to
adjacent offsite public improvements are considered onsite land improvements.
2. Supplemental Cost Estimates include:
a. Demolition. Demolition is defined as onsite work to remove existing structure, footings,
foundations, and utilities to prepare a site for new construction.
1) Include the removal and disposal of debris and fill and compaction of excavations. Include
general contractors' and subcontractor’s overhead and profit in the estimate.
2) Report on Form HUD-92326, under “demolition,” and Form HUD-92264, Section O.
Appraiser will report Demolition costs in Section J of Form HUD-92264.
3) Demolition should not be included in the construction contract.
4) ”Demolition” in this context does not include interior demolition within existing structures
undergoing substantial rehabilitation.
b. Offsite work is work not adjacent to project boundaries including utilities, walks, curbs,
gutters, streets, drainage structures, landscaping, etc., that extend away from the project site.
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These improvements are not included in the construction contract. Report on Form HUD92326 and Section M of Form HUD-92264.
3. Cost Not Attributable to Dwelling Use. Cost-not-attributable consists of certain project amenities
and uses other than dwelling uses. This cost is calculated by the cost analyst and used by the
appraiser to increase the maximum mortgage amount under Criterion 4 of Form HUD-92264-A
(Statutory maximum insurable mortgage amount per dwelling unit). The calculation is material
only when project costs are likely to exceed the statutory limit and when a portion of those costs
are not attributable to dwelling units. (Criteria 4 is typically not material in determining the
maximum insurable mortgage, and accordingly costs-not-attributable need not be calculated except
for properties where Criteria 4 is the determining criterion.
Cost-not-attributable must be included within the estimate of total structures and land
improvements, and the costs must be itemized and reported separately on Form HUD-92326 and
Section M of Form HUD-92264. The reason to estimate cost-not-attributable is to isolate
construction costs for: (A) all improvements and for (B) selected improvements not related to or
necessary for the dwellings (non-residential use). In each case the total is without general
requirements and fees. The percentage of B divided by A is the percentage of costs not
attributable. Such a percentage should be calculated for both residential buildings/spaces and
commercial buildings/spaces in the project, and neither number may exceed a fixed maximum of
15%. The two are added together to obtain the project percentage of cost-not-attributable. This
figure is used to allocate a proportionate share of all other mortgageable costs (fees, construction
period interest and finance charges, etc.) between dwelling use and costs not attributable to
dwelling use. The total of all costs-not-attributable times the maximum percentage loan-to-cost
ratio is added to the maximum statutory limit calculated for the number of units by type. The sum
is the maximum mortgage amount per Criteria 4. (See Appendix 5J).
4. Allowances and Fees. Allowances and fees are reported on Forms HUD-92326 and HUD-92264
as lump sum dollar amounts. Depending upon data, they may be calculated either as lump sums,
or as percentages of subtotals which are converted to dollar amounts.
a. General Requirements (Job Overhead). Covers project specific overhead expenses. Calculate
as a percentage of the sum of Total Land Improvements and Total Structures. The percentage
amount is determined by the nature, difficulty, size of the project, and the characteristics of the
neighborhood.
1) Include:
(a) Supervision and job-site engineering;
(b) On-site job office expenses directly related to the project including clerical wages;
(c) Temporary buildings, tool sheds, shops, and toilets,
(d) Temporary heat, water, light and power for construction;
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(e) Temporary walkways, fences, roads, siding and docking facilities, sidewalk and street
rental;
(f) Construction equipment rental not included in trade item costs;
(g) Cleanup and disposal of construction debris not included in trade or sub-contract costs;
(h) Medical and first aid supplies and temporary facilities;
(i) Security guard wages and related costs;
(j) Theft and vandalism insurance. (does not include Builders Risk Insurance);
(k) Builders Risk Insurance may be included with general Requirements or Contractor’s
other fees only if paid for by General Contractor.
Builders Risk Insurance is separate from any theft and vandalism insurance policy
provided by the general contractor. While Builders Risk Insurance may be placed by
either the general contractor or the Borrower, it is common industry practice for the
contractor to place the policy, with the contractor named as Insured, and the Borrower
named as “Other Insured.” Regardless of which party is responsible for payment, the
Borrower must always be named as an Insured party, as per Builder’s Risk Insurance
requirements in Form HUD-92447, Property Insurance Requirements. If the contractor
pays for the policy, the premium is included in the construction contract under General
Requirements. However, if the Borrower pays for the policy, the insurance premium is
included under Insurance on Line G-55, Insurance, of Form HUD-92264.
2) Salaries for site visits by owners, partners, or officers of the general contracting firm are
included in General Overhead, except for payment for work done on the job by these
individuals in a trade capacity, as laborers or supervisors.
b. General Overhead. Covers contractor’s home office or principal office and general business
expenses. The amount is fixed at two percent of the sum of Total Land Improvements, Total
Structures, and General Requirements.
c. Builder’s Profit or Fee. Builder’s Profit or Fee is calculated as a percentage of the sum of
Total Land Improvements, Total Structures, and General Requirements. The percentage
amount is determined by the nature and location of the project and market conditions, and
should be compared to the amount of the fee negotiated between the borrower and contractor
for reasonableness. When the general contractor is an independent third party (no identity of
interest with the borrower or sponsor) the Builder’s Profit or Fee is an actual cost that must be
paid to the general contractor. This applies to all non-identity of interest general contractors
participating in any of HUD’s mortgage insurance programs. When the general contractor has
an identity of interest with the borrower, see paragraphs “d” and “e” below.
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d. Builder Profit in Value Based Programs-Section 231 Substantial Rehabilitation and 223(f).
Except for certain affordable housing transactions, builder or general contractor profit or fee or
development fees payable to affiliates of the borrower, (i.e., identity of interest participants),
are not mortgageable costs and should not be included in the cost estimate. Reasonable and
customary builder or development fees payable to unaffiliated third parties are eligible. (See
Appendix 3B for treatment of fees in certain affordable housing transactions.).
e. BSPRA. Builder’s and Sponsor’s Profit and Risk Allowance (BSPRA) is a presumed profit for
development and construction of a multifamily project. It is unique to applications for new
construction or substantial rehabilitation under HUD’s “cost based” programs (Sections 220
and 221(d)(4)) when an identity of interest exists between the borrower and the general
contractor. BSPRA is always 10% of replacement cost not including land, but is itself not an
actual cost or fee to be paid to the identity of interest general contractor and/or development
entity (sponsor). It is used to calculate the mortgage amount in Criteria 3 on the HUD 92264A. Its effect is to allow the identity of interest borrower/developer/contractor to contribute its
presumed builder/developer profit (BSPRA) as equity whenever the mortgage amount is
limited by Criteria 3. In a balanced summation of sources (loan proceeds, equity, etc.) and
uses (costs of land, development, construction, capitalized interest, etc.) this presumed profit or
BSPRA is added both to uses and sources. When Criteria 3 prevails, the mortgage amount will
be a fixed percentage of costs. The “B” in BSPRA refers to the presumed fee of the builder or
general contractor. The “S” refers to development cost of the sponsor/borrower outside the
general contract and is called SPRA. The appraiser calculates the BSPRA amount and enters it
on line G 68 of Form HUD-92264. When BSPRA is used, the lender should:
1) Calculate an equivalent builder’s profit (the “B” portion of BSPRA) and an equivalent
subtotal.
2) On the Builder’s Profit line of Form HUD-92326 and on Line G 44 of Form HUD-92264,
enter the word “BSPRA”. The equivalent builder’s profit calculated above is not included
in the Total for All Improvements (bottom of Form HUD-92326 and Line G.50 of Form
HUD-92264).
Use of BSPRA is not mandatory. A borrower may pay an affiliated general contractor an
actual builder’s fee or profit provided that: the amount of the fee is reasonable and customary;
the form of the construction contract is cost plus fixed fee; the mortgagor and general
contractor cost certify; and, the amount of the fee is funded in the construction escrow
established at initial endorsement.
f. Architect’s Fees. The source of this cost is the Owner-Architect Agreement, (see Section
5.3.D). If there are multiple prime agreements (e.g. separate architect and engineer), total all
fees in line G 45 of HUD-92264 and itemize in Section O, Remarks. The lender’s construction
analyst should copy the fee amounts, unaltered, to the cost estimate. The construction analyst
should document architect’s fees and compare with existing fee data to determine
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reasonableness. The construction analyst should inform the lender’s underwriter if fees are
significantly different from the data range, but the fees should not be altered on the cost
estimate without a prior meeting between the lender, lender’s construction analyst, borrower,
and project architect.
For new construction and substantial rehabilitation applications, fees should be documented as
a percentage of the sum of Total Land Improvements, Total Structures, General Requirements,
General Overhead, and Builder’s Profit. The Architect’s Fee usually consists of a design fee to
cover the cost of the preparation of all construction documents (working drawings and
specifications) up to start of construction; it typically represents 75 to 80 percent of the total
fee. The Architectural Supervision fee covers the cost of the project architect’s construction
inspections, reports, and preparation of change order requests; it typically represents 20 to 25%
of the total fee.
g. Bond Premium. Covers the cost of Payment/Performance Bonds used to ensure completion of
construction in event of a default by the general contractor. The bonding or surety company
determines the premium or cost based on its perception of risk in light of the contractor’s
financial capacity and performance history and the nature of the work.
h. Other Fees. Costs of various required items and services can vary greatly among jurisdictions
and localities. Other Fees can be paid either by the borrower or the general contractor. The
borrower should submit an itemized list of all project-related Other Fees as an aid to the
construction analyst. Other Fees can include:
1) Site and topographic surveys;
2) Subsurface exploration (test borings);
3) Soil tests, concrete tests, and other construction testing;
4) Fees for utility taps and connections;
5) Impact fees for public infrastructure;
6) Building permits and licenses; and
7) General Contractor’s cost certification audit fee (if required). NOTE: The borrower’s cost
certification audit fee is not to be included in Other Fees since it is recorded separately on
Line G. 66 of Form HUD-92264.
8) Builders Risk Insurance may be included with general Requirements or Contractor’s other
fees (only if paid for by General Contractor).
i. Furniture, Fixtures, and Equipment (FF&E) includes substantial indoor and outdoor furniture
and equipment (e.g. trash dumpsters, pool or recreational equipment, permanent lobby or
reception area furnishings). It may not include titled vehicles, minor items of relatively
insignificant cost such as furniture accessories, income from rental unit furnishings, hand tools
and hand power tools, or expendable items. An itemized schedule of FF&E with cost for each
item will be submitted with the cost documents and reviewed by the lender’s construction
analyst for acceptability. Costs may include only delivery and placement of the item. The
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dollar amount of FF&E will be reported on line G.60 of the HUD-92264; “AMPO percent
(nonprofit only)” will be lined out and substituted with “FF&E”.
5. Construction Time, Construction Period. The construction period is measured as a number of
consecutive months of elapsed time and will vary depending on the scope of work, size and
building type and construction technologies used. For any job with Level 2 and/or Level 3
alterations and any substantial rehabilitation or new construction, a job schedule must be
established. The schedule is not a simple calendar, but rather a graph or table illustrating both
elapsed time for particular tasks, trades or discrete portions of the work as well as the necessary
sequence or order of tasks or trade items including noted dependencies among tasks, commonly
referred to as a work breakdown schedule. For substantial rehabilitation and new construction,
report the construction time in months on Line G. 52 of form HUD 92264. This figure will be
used to estimate the amount of capitalized interest and carrying costs during the construction
period.
E. CNAs are required for all applications. For gut rehabilitation and new construction, the lender’s
construction analyst may prepare the CNA based on the project architect’s proposed plans and
specifications assuming construction completion (that is, the CNA will estimate only future repairs
and replacements and not immediate construction). In other applications the CNA is prepared by the
needs assessor based on existing conditions. In either instance it is the lender’s responsibility to
assure that the estimated remaining useful life of components and the costs of future replacements and
any immediate repairs are estimated consistent with Chapter 5 and its appendices. The lender’s
underwriter will develop a financial plan for funding future capital needs by using the “Financial
Factors form” (See Appendix 5G). Based on the financial factors, the CNA e Tool will generate a
schedule of annual deposits to the Reserve for Replacement (R4R) escrow. In accordance with
Appendix 5G, the lender must adjust the financial factors so as to plan funding sufficient to pay
estimated future capital needs. The borrower’s schedule of deposits to the R4R will be based on actual
expected capital needs, not on a percentage of construction cost or mortgage amount.
F. Whether prepared based on conditions at an existing property or for a property to be built, the CNA e
Tool will generate an estimated replacement cost for each structure, which should be used as the
Schedule of Insurable Values, (HUD form 92329). In the case of CNAs based on construction to be
completed, the lender’s construction analyst should ensure that the replacement cost per square foot
entered on the “Buildings form” of the CNA e Tool is consistent with cost estimates for each identified
building.
5.12
Cost Package for Firm Commitment
As part of the Firm Commitment application, the lender’s construction analyst will prepare a detailed cost
estimate and all required reports and recommendations as described below. For streamlined processing,
these same documents will be prepared in draft consistent with the draft drawings and specifications.
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However, these documents must be corrected as needed and submitted in final form based on the final
drawings and specifications no later than 30 days prior to Initial Endorsement.
A. Required Forms.
1. Form HUD-92326. Used for preparation of detailed construction cost estimate for new
construction and substantial rehabilitation projects.
2. Form HUD-92331-B. Used to make detailed comparison of trade line items between Estimators’ cost
estimate (HUD-92326) and Contractor’s trade payment breakdown (HUD-2328) for new construction
and substantial rehabilitation projects.
3. Form HUD-92329. Property Insurance Schedule, prepared in the CNA e Tool, used to determine
the Insurable Value for each project structure and the aggregate sum for all structures for all
applications. Form HUD-92447, Property Insurance Requirements, will be prepared by HUD and
provided to the lender at closing.
4. Form HUD-92264. Project Income Analysis and Appraisal.
a. Section G. Estimated Replacement Cost, Line 36a through 52 is used to summarize Total
Structures, Land Improvements, General Requirements, and Fees from Form HUD-92326, and
also records estimated construction time. This section is primarily used for substantial
rehabilitation and new construction.
b. Section M. Used to summarize Cost Not Attributable to Dwelling Use (lines 10 through 15),
and Offsite Requirements (lines 16 and 17).
c. Section O, Remarks. Used to explain Unusual Land Improvements, Other Fees, itemization of
professional fees (e.g. engineers), overall difference between lender's and borrower's cost
estimates, and other cost items.
B. For new construction and substantial rehabilitation proposals, prepare detailed cost estimate on Form
HUD-92326 using instructions in Section 5.11; sign form on the “Estimate Prepared by” line and
certify. Refer to standard certification in Chapter 11, Section 11.2.
C. Resolve differences in lender’s and contractor’s construction cost estimates.
Before the Firm Commitment application can be submitted for HUD review, the construction cost
estimates prepared by the general contractor and the lender’s construction analyst must be reconciled.
The lender’s analyst is responsible for resolving major differences between the two estimates. When
the two estimates are generally consistent, the lender may use the contractor's cost figures as shown on
Form HUD-2328 as its cost estimate. The lender’s construction analyst will use the following review
procedure for new construction and substantial rehabilitation applications:
1. Prepare trade line item comparison of lender’s and contractor’s cost estimates using Form HUD92331-B.
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a. Enter costs from Forms HUD-92326 and HUD-2328. For multiple-structure type projects, a
separate HUD-2328 must be submitted for each structure type, and a master HUD-2328 for the
entire project.
b. Calculate and list line item percentage differences.
2. Review trade line item differences and note all variations beyond normal ranges. The range of
trade line item differences varies from trade to trade. Major trades (e.g. engineers, carpentry)
should have a smaller range difference than minor trades (e.g. sheet metal). The analyst should
judge the variations based on established data.
Front-end Loading: The analyst should be alert for a pattern of front-end loading in trade items,
where the contractor inflates costs for trade items needed early in the job schedule in order to
secure more mortgage proceeds early. Such a pattern may indicate inadequate working capital or
risky business practices by the contractor. Advances of funds from loan proceeds should always
accurately reflect the cost of work completed, and payment should follow, never precede, the
completion of work or portions thereof for which payment is requested.
3. Meet with contractor to discuss and resolve all questionable trade line item differences. The
resolution process may result in either the estimator or the contractor, or both, recalculating costs
of various trade line items based on discussions.
a. If differences are resolved, accept costs in Form HUD-2328 and use as lender’s Cost Estimate
in Form HUD-92264.
b. When dealing with suspected front-end loading, require rigorous documentation of early trade
items that are higher than normal.
c. If differences cannot be resolved, do not accept costs in Form HUD-2328.
1) Use the construction analyst’s cost estimate as the lender’s cost estimate.
2) Inform the lender’s underwriter that the contractor’s HUD-2328 is unacceptable.
3) Advise the lender’s underwriter to meet with the borrower and the contractor for further
attempts at resolution.
D. Prepare cost portions of Form HUD-92264, using instructions in Section 5.11. Sign form in the “Cost
Processor” box and certify (see standard certification in Chapter 11, Section 11.2).
E. Property insurance schedule, Form HUD-92329, based on CNA e Tool replacement cost per building.
Common equipment that serves the entire property or portions thereof (e.g. a boiler and cooling tower
assembly) should be included with the cost of the building where it is located and not prorated among
the buildings served by the equipment.
F. Prior approval of identity-of-interest subcontractors’ proposed costs including overhead and profit is
required.
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1. An identity of interest is a relationship that exists giving the borrower or general contractor
apparent control or influence over a subcontractor, equipment lessor, material supplier, or
manufacturer of industrialized housing. (See General Contractor’s cost certification instructions in
Chapter 13 - Cost Certification, for definition of relationships).
2. Requirements. When subcontractors, material suppliers, or equipment lessors have an identity of
interest with a borrower or general contractor, the lender must approve the subcontract amounts,
including specific amounts for subcontractor general overhead and profit.
3. Timing. Approval is required before work begins under the subcontract. Failure to secure prior
approval will result in the disallowance of the total general overhead and profit of the
subcontractor at cost certification.
4. Request for approval (with the subcontracts, agreements, or leases) is submitted to the lender’s
construction analyst, whose recommendations must include:
a. Acceptability of the documents.
b. Reasonableness of guaranteed maximum prices for the subcontract work.
c. Appropriateness of general overhead and profit dollar amounts.
5. Mandatory Conditions for Approval.
a. Subcontracts:
1) Must be a separate subcontract for each trade.
2) Must clearly identify scope of work.
3) Must be on a cost plus fixed fee basis:
(a) Guaranteed maximum dollar amount for work.
(b) Specific dollar amount for general overhead and profit.
4) Disapprove “paper conduit” arrangements where work is to be done by general contractor
personnel or other subcontractors, suppliers or lessors.
b. Subcontract prices: For this criterion, recent reliable data is a better test than whether higher
bids were submitted.
1) The total price must not exceed the amount shown for the trade item on the accepted Form
HUD-2328.
2) Total price must not exceed reasonable prices taken from available data.
NOTE: The lender’s cost analyst must resolve disagreements in trade prices with the
subcontractor.
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c. Overhead and Profit. The amounts for general overhead and profit shall be no higher than the
typical prices for the specific trade.
d. Subcontractor entity. The burden of proof of 1, 2, and 3 below is on the subcontractor.
1) The firm must operate and have documented experience as a subcontractor for the specific
field covered in the subcontract.
2) Must control labor, materials, and equipment typical for the trade.
3) Must do significant business in its specific field with borrowers and general contractors
having no identity of interest.
6. If total of all identity of interest subcontracts, purchases and leases is less than ½ of 1 percent of the
mortgage amount, the requirements for each identity of interest subcontractor to cost certify may be
waived by the MF Regional Center/Satellite office Director upon notification by the lender.
7. Prepare letter of approval or disapproval to the borrower or general contractor. Letter must
address all mandatory conditions.
a. Approval will indicate any conditions, including whether or not subcontractor must cost certify.
b. Disapproval will state the reason for disapproval and indicate any cost certification
requirements.
G. Cost Concerns for Substantial Rehabilitation.
The detailed cost estimate should include and evaluate the following:
1. Interior demolition and removal of: floors, walls, roofs, doors and windows, finishes, cabinets,
appliances, plumbing, HVAC, and electrical, including boilers and central air conditioning. Also
includes abatement of asbestos and lead-based paint. Enter amount in Special Construction trade
line in Form HUD-92326. If individual trades include removal (e.g. remove and replace cabinets),
removal costs may be included in the trade line item.
2. Site preparation demolition is not part of the Construction Contract and should be estimated and
recorded in the same way as for new construction.
3. Allowances and Fees for substantial rehabilitation, especially General
Requirements and
Architect’s Fees, are calculated the same way as for new construction, but they should reflect the
risk and responsibility inherent in rehabilitation and consider the location of the project. It is
recommended that the construction analyst keep separate data for this item.
4. Rehabilitation time is determined the same way as construction time for new construction, but the
data used must take into account the time required for interior demolition, as repair and
rehabilitation cannot begin until such demolition is complete.
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5. Rehabilitation cost not attributable to dwelling use includes an “as-is” value for non-attributable
items in addition to a value for actual work performed. Calculate by using the format in the
Appendix 5J.2. The construction analyst completes steps 1, 2, and 3; steps 4 through 8 are
completed by the appraiser.
6. Contingency reserve amount is based on available data for the type and condition of structure.
Calculate as percentage of the sum of structures, land improvements, and general requirements.
Percentage ranges from 10 to 15%, depending on the condition of the project, extent of
rehabilitation, and experience and financial capacity of the borrower and contractor. Enter amount
on line G.71 and in Section O of Form HUD-92264. Subject to lender and HUD approval, the
Borrower may elect to apply any funds remaining in the substantial rehabilitation construction
contingency account after completion of the approved rehabilitation, to:
a. further improvements, betterments or upgrades to the property,
b. an initial deposit to the Reserve for Replacement account; or
c. reducing the mortgage balance.
If excess funds from contingency are used for betterments, those additional improvements will not
be considered as the basis for a request for an increased mortgage amount.
H. Cost Concerns for Refinance/Acquisition-Section 223(f) and 223(a)(7).
1. The lenders must determine that:
a. The CNA describes, quantifies and estimates immediate repairs and future needs consistent
with Chapter 5 and Appendix 5G and that replacement costs data sources are identified;
b. The assessed remaining useful lives of components and estimated useful lives for alternatives
are justified whenever the entered values depart from the Standard Estimated Useful Life
Table;
c. The flags obtained from validation of the needs assessment via the Validation Engine of the
CNA e Tool are either removed by amending the needs assessment or explained in a flag
comment.
2. The cost portions of HUD 92264 should be completed based on the replacement cost of buildings
as reported in the CNA e Tool.
3. The lender must review the needs assessor’s “Repair, Replace Add New Recommendations” and
determine that life safety and accessibility repairs have been identified with a “yes” in the
appropriate indicator, and that the recommended timing, cost and other action are appropriate and
consistent with observed conditions.
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4. The lenders should review any immediate repairs for 223(a)(7) applications to assure that repairs
are limited and do not exceed routine maintenance, except for needed remedies for accessibility
deficiencies.
5.13
HUD Procedures
All applications will be assigned to a Senior Underwriter or underwriting team by the Production Chief.
The underwriting team will complete an early warning system (EWS) review of each application and
identify which applications can be assigned to and reviewed by a single underwriter and which may
require the assistance of the Technical Branch Chief and/or a HUD construction analyst (architect, cost
analyst). In general all new construction and substantial rehabilitation applications should be reviewed by
a construction analyst. In addition, refinance and acquisition applications with combinations of repairs
and alterations exceeding $15,000 per unit in cost and/or including Level 2 and Level 3 alterations should
be reviewed by a HUD construction analyst. Applications for Section 223(f) for properties less than 10
years old and for Section 223(a)(7) should not require the assistance of a construction analyst unless the
CNA contains a corrective action plan for accessibility deficiencies or the HUD underwriter observes that
such a plan is required but not submitted. Section 223(f) applications for properties older than 10 years
with repairs and Level 1 Alterations will require the underwriter to determine whether any issues are
observed that might require a technical review.
A. When engaged to complete a technical review or consider a particular lender exhibit, the HUD
construction analyst should not redo or correct the lender’s work. Instead the review should be
summarized in writing for the HUD underwriter.
1. Review the lender deliverables for completeness;
2. Examine the review report and the A/E and cost exhibits and recommend either acceptance,
acceptance assuming specified modifications, or rejection of the A/E and cost portion of the Firm
Commitment submission; report to the underwriter on the form(s) at Appendix 5F and following
as appropriate for the application stage and program.
B. Any application for an existing property proposing repairs and alterations in any combination that
results in uncertainty about program eligibility (refinance/acquisition vs. substantial rehabilitation)
should be reviewed by the HUD construction analyst, who shall review the immediate repairs
identified in the CNA e Tool.
1. The costs of all repairs should be totaled and compared to the cost per unit threshold (5.1.D)
adjusted for the applicable high cost factor. If the total cost of immediate repairs exceeds the
threshold, the application is for substantial rehabilitation.
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2. All the immediate repairs should be sorted by “Need Category” and “Need Item” so as to establish
cost-by-system (5.1.B) and the cost-by-system compared to the estimated replacement cost for the
entire system as configured at the property. If two or more of the systems exceed 50%
replacement measured by cost, then the application is substantial rehabilitation.
C. CNA e Tool and the Single Underwriter Way of Work.
The Reviewer Tool portal of the CNA e Tool is available only to authorized HUD (and USDA) staff.
Use of the tool is to be consistent with the single underwriter approach and requires that completed
work be presented to senior managers before a CNA is returned to a lender with comments or is
approved as part of an underwriting decision on an application for mortgage insurance. Each user will
be assigned at least one of three possible roles:
1. Assigner. Assigners generally will include the Production Chief, and Branch Chiefs and may
include Senior Underwriters. Assigners should have dual roles, i.e., assigners typically will also
have a reviewer role. Assigners receive nightly reports on all CNAs submitted to HUD including
information on the program for which application is made or the purpose of the CNA, the name
and location of the subject property and the status of the CNA (submitted, under review, ready for
decision, returned and approved.). Assigners will also receive a nightly workload report indicating
the number of CNAs assigned to each reviewer and certain information useful to assess relative
workloads. Using these reports assigners will allocate or “assign” submitted CNAs to staff who
have the reviewer role. Assigner’s also have the responsibility to open CNAs made “ready for
decision” by their staff, and to modify or edit the reviewer’s comments. If an assigner desires a
reviewer to modify comments or reconsider issues or seeks additional review from technical staff,
the assigner identifies the reviewer and assigns the CNA to that reviewer. When satisfied that the
review is complete and that comments or identified issues require a lender response, the assigner
“returns” the CNA to the lender. When the lender addresses comments and resubmits the CNA the
process is repeated, until the Assigner is satisfied that all CNA and other underwriting
requirements have been addressed and a Firm Commitment can be issued, whereupon the assigner
“approves” the CNA. Attachments and reports from the approved CNA may be printed for use as
attachments to the Firm Commitment as needed. The approved CNA, including all attachments, is
recorded permanently in the CNA e Tool database and can be retrieved for comparative purposes
and/or for use in asset management functions.
2. Reviewer. Reviewers receive assignments from Assigners. Generally reviewers are underwriters
and/or technical staff. The CNA e Tool reviewer assigned to the application can open the CNA in
the Reviewer Tool. Reviewers have access only to CNAs assigned to them. Reviewers use the
Reviewer Tool to analyze the assigned CNA, enter comments both general and specific and upon
completion of review indicate that the CNA is “ready for decision.” A Reviewer may “reassign”
to another reviewer a CNA assigned to him which enables staff to share work or solicit assistance.
When satisfied that all relevant and material issues have been identified and noted in comments,
the reviewer changes the CNA status to “ready for decision” whereupon the assigner is able to
consider the reviewer’s work, modify the reviewer’s comments and either assign it back to the
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same or another reviewer for further work, return it to the lender for the lender to address
comments, or approve the CNA.
3. Viewer. A viewer is any staff person who regularly needs to see CNAs but not act on them.
D. Work-sharing.
The Reviewer Tool portal of the CNA e Tool supports work-sharing across all HUD offices
geographically and among different program offices, e.g. Office of Multifamily Production, Office of
Recapitalization, and Office of Asset Management and Portfolio Oversight.
E. Detailed Instructions for Users.
Detailed instructions for users are available at the CNA e Tool homepage (url to announced) and
specifically in the CNA e Tool Internal Users Manual.
F. Timely consultation and review by other, appropriately experienced, HUD staff may expedite
applications and avoid delays at closing. In particular, survey issues, proposed easements and joint
use and access agreements that impact design, construction or operating expense estimates should be
reviewed by Regional Counsel before final underwriting is completed.
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Chapter 6
Formerly Cost
This chapter has been combined with Chapter 5 and is reserved for use in future
MAP Guide revisions.
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Chapter 7
Valuation Analysis & Market
Study Guidance
7.1
Introduction
A. This chapter provides guidance on HUD’s Valuation and Market Study requirements for Third-Party
MAP Appraisers, MAP Lenders and Underwriters, and HUD staff involved in reviewing appraisals.
B. The Valuation Analysis evaluates the existing or proposed project as collateral and security for a longterm mortgage. Depending on program requirements, this includes an estimation of the market value
of the land and/or the property and an analysis of the market need, location, residential and
commercial rent and other income, and operating expenses of the project.
The Valuation Analysis develops conclusions with respect to feasibility, suitability of improvements,
extent, quality, and duration of earning capacity and other factors that have a bearing on the economic
soundness of the project. The objective of the appraisal is to establish value for use in underwriting
the supportable loan amount and to determine if the project will meet the market demand at rents that
will pay operating expenses, debt service and provide for sufficient deposits to any reserve accounts.
C. The Department has statutory authority (12 USC 1708(g)) to prescribe standards for the appraisal of
all projects to be insured by the Federal Housing Administration. Such appraisals shall be performed
in accordance with uniform standards, by individuals who have demonstrated competence and whose
professional conduct is subject to effective supervision. Under the MAP Program, HUD relies on the
MAP Approved Lender to provide such supervision through the underwriting, loan approval, quality
control, and compliance program and protocols. Additionally, the Department requires a USPAP
Compliant appraisal review by a HUD Review Appraiser (HRA) for medium to high risk transactions.
D. The Multifamily Regional Center Director has authority to rely on the lender’s appraisal review
without a HUD staff appraiser review. Exercise of such authority may be appropriate for low-risk and
some medium-risk transactions in which the application is complete, reliable and not particularly
complicated. In all cases, a qualified HUD employee must review each appraisal for compliance with
USPAP and HUD requirements.
1. Low Risk Transactions – Includes most Section 223(f) projects with minimal repairs.
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2. Medium Risk Transactions – Includes 223(f) projects where significant repairs may be required,
RAD or Tax Credit projects as well as Substantial Rehabilitation projects where there is minimal
tenant displacement. This does not include projects that meet the criteria for large loan
underwriting. New Construction projects may be included where the underwriter is experienced
and the market is well established.
3. High Risk Transactions – Include most New Construction Projects and projects that meet large
loan underwriting criteria. Also includes transactions with leasehold (versus fee simple)
ownership interests.
7.2
Selection of Appraisers and Market Analysts
A. The lender is responsible for the selection and approval of appraisers and market analysts who are familiar
with MAP guidelines. Lenders must ensure that each appraiser and market analyst selected is qualified to
appraise or perform market analyses for multifamily properties by reviewing their education, quality, and
frequency of multifamily appraisal experience, sample appraisals and market studies, professional
affiliations, and state licenses or certifications. The ability to complete various HUD forms related to the
appraisal, e.g. HUD-92264, 92273, 92274 etc., is also a requirement. The lender may assist the appraiser
in the preparation of these forms, but the appraiser must sign them. The HUD 92264-A is an underwriting
form prepared by the MAP Lender’s underwriter and is not a required appraisal exhibit.
B. Should the lender have difficulty finding a Certified General Appraiser, the Appraisal Subcommittee
of the Federal Financial Institutions Examination Council maintains a national registry of Certified
General Appraisers who are authorized, under Federal law, to perform appraisals in connection with
federally related transactions. The lender may review this list at http://www.asc.gov, although
inclusion on this list is not an indication of competency to perform multifamily appraisals.
C. The appraiser or the market analyst must be independent of and may not be affiliated with the loan
originator, broker, developer, borrower, MAP Lender or any individual or institution involved in any
other financial role in the application. The underwriter shall not act as the appraiser or market analyst.
D. The MAP Lender’s responsibility for supervision of the appraisal and market study (and any other third
party reports) requires that the third-party appraiser be selected by the MAP Lender’s underwriter. The
appraisal must be ordered and paid for by the MAP Lender and not by the originator, broker, developer or
borrower. The appraisal must identify HUD as an intended user of the report. Appraisals prepared by
any entity not engaged and paid for by the lender, are not acceptable and will not meet HUD’s
appraisal requirements.
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E. The market study should be ordered and paid for by the lender. However, a market study that has been
prepared for the borrower by a third party market analyst and meets all other market study
requirements of the Guide, including timeliness, is acceptable. The lender is responsible for the
review and acceptance of all market studies submitted with the application.
F. There shall be no discrimination on the basis of race, color, nationality/ethnicity, religion, sex,
disability, familial status, LGBT and age in the selection of an appraiser or market analyst.
G. HUD reserves the right to examine the credentials of all appraisers and market analysts hired by the lender,
and to reject any individuals that it considers unqualified. HUD staff with concerns about a third party’s
capability, competence or experience should contact the Multifamily Asset Counterparty Oversight
Division (MACOD) though their supervisory chain. HUD does not formally approve appraisers or
appraisal firms as being “MAP Approved.” Rather, the MAP Lender is responsible for ensuring the
professionalism and competence of its contracted appraiser and the quality of the ultimate appraisal
product submitted as a component of the lender’s application.
Note: HUD will not reject any third-party contractor without having first issued warning letters to the
lender highlighting the areas of non-compliance in their submitted reports. Third-party contractors will be
afforded the right of appeal and due process in defending their work, consistent with MACOD procedures.
H. The most current appraiser Certification required by Uniform Standards of Professional Appraisal
Practice (USPAP) must be signed by the appraiser. In addition, the appraiser must include a
certification that the racial/ethnic composition of the neighborhood surrounding the project in no way
affected the appraisal determination.
7.3
Third Party Appraiser and Market Analyst Qualifications
A. Appraiser Qualifications
1. Each appraiser must meet the following minimum qualification requirements:
a. Be a Certified General Appraiser under the appraiser certification requirements of the state in
which the subject project is located;
b. Be currently active and regularly engaged in the appraisal of multifamily properties;
c. Meet all requirements of the Competency Rule described in USPAP, which applies to each
certified appraiser who signs the report. If any of the persons involved in preparing the report
is a trainee acting as an assistant, this must be disclosed in the report;
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d. Have at least three years of income project appraisal experience;
e. Be knowledgeable concerning current real estate market conditions and financing trends in the
geographic market area where the subject project is located, and be experienced in appraising
multifamily properties with the complexity and characteristics similar to those of the subject
project. If the subject contains commercial space, Low Income Housing Tax Credit (LIHTC)
or other subsidies, the appraiser must have acceptable prior experience in the appraisal of
comparable properties.
2. These requirements apply to each Certified General Appraiser signing the report. It is not
permissible for an appraiser who is not certified in the appropriate jurisdiction to circumvent
certification requirements by having a locally certified appraiser co-sign the report. Appraisers
who are not certified in the appropriate jurisdiction may not perform the required project
inspections of the subject or comparable properties. The appraiser must disclose any of the
persons involved in preparing the report who are not certified general appraisers and are acting as
an analyst, assistant or trainee.
3. Temporary Certification.
Temporary certifications are permissible; however, the above
competency requirements still apply. The appraiser is responsible for checking the accuracy of all
information obtained from local sources and must indicate the names of all individuals who
provided material assistance in preparing the appraisal. A temporary certification must be
obtained prior to beginning the assignment. The lender may select appraisers who have temporary
certification who have documented how they will achieve competence in the subject area in
accordance with USPAP.
B. Market Analyst Qualifications
1. Each Market Analyst must meet the following minimum qualification requirements:
a. Have at least 3 years of experience in performing market studies for income producing
properties,
b. Be currently active and regularly engaged in performing market studies for multifamily
properties,
c. Be knowledgeable concerning real estate market conditions and financing trends in the
geographic market area where the project is located, and
d. Be experienced in performing market studies for multifamily properties with the complexity
and characteristics similar to those of the subject project. If the subject contains commercial
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space, LIHTC or other subsidies, the market analyst must have acceptable prior experience
with comparable properties.
2. MACOD will investigate any Regional Center or Satellite Office complaints that a lender is
contracting unqualified or unlicensed appraisers or market analysts.
7.4
HUD Workload Sharing Reviews of Appraisal and Market Study
Reports
A. Workload Sharing. With the reorganization of Multifamily Production, HUD is using Workload
Sharing, whereby certain underwriting functions may be transferred to staff who are in locations that
are distant from the project under review. These functions may include, but are not limited to,
appraisal and market study review.
B. Third Party Appraisers and Market Analysts working on MAP transactions should assume that their
work will be subject to review under Workload Sharing. HUD staff that are performing reviews under
Workload Sharing may not always be able to physically inspect the subject and comparables, and the
market information used to verify and determine the validity of conclusions may be from nationally
purchased data sources such as, but not limited to REIS. (Note: In all cases the project will be
physically inspected by a qualified HUD staff member.)
C. Project locations that are outside the urbanized areas covered by these sources are affected by market
forces for which there will be little property specific information available to HUD staff. HUD staff
will typically have the same level of knowledge of a particular project or location as the professional
who has done the extensive research and analysis necessary to develop credible conclusions. The
review function would not be efficient or sensible if it involved the same level of time required to
develop and prepare an appraisal report/study. However, reviewers must take the time needed to
make contacts with market participants to develop as much knowledge as possible to reach reliable
conclusions about the work under review.
D. Third party report providers and MAP underwriters must ensure the application and supporting
material contain sufficient information for remotely located HUD staff to make a decision. For
projects that are in a location that are not adequately covered by national sources, the reports must
reference the local sources and contrast them with recognized national sources. The goal is to assure
that the reviewer can better understand the nuances of the local market.
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Content and Format of the Market Study
A. Purpose and Focus of the Study. The purpose of the market study is to assure that there is enough
sustainable demand for additional units without adversely impacting the existing supply, so as to
maintain a balanced overall market. The focus of the market study is on the overall demand within a
defined market area, and of the proposed project’s ability to capture and sustain a share of the total
(incremental demand). The primary and secondary market areas analyzed by the lender’s market
analyst may be narrower in scope than the market analysis prepared by the HUD Economic and
Market Analysis Division (EMAD), which analyzes the broader Metropolitan Statistical Area (MSA),
county, or smaller submarket area as appropriate. The market analyst must, however, also discuss the
larger MSA or county. The study must estimate the number of renter households with sufficient
incomes to afford the type of housing at the rents proposed at present, as well as any expected changes
in rental housing demand in the foreseeable future (typically the next 3 to 5 years). The study must
also identify and discuss any risks associated with longer-term changes in rental housing demand
(during the term of the mortgage). In addition, the study must estimate the number of units that the
market could reasonably absorb over a specified forecast period, which is typically 3 years, taking into
consideration competitive units in the existing inventory, units currently under construction, and units
in the planning pipeline, as well as the gross and contract rents of those units.
For projects designed for the elderly, families, and persons aged 62 and over, the study must define the
age restrictions, the anticipated household configuration and any anticipated household services. The
study must also estimate the number of elderly households with sufficient incomes to afford the type
of housing and services (if any) under study, any expected change in the number of such households,
the proportion of those households that would need and demand such housing, and the number of units
that the market could reasonably absorb and sustain over the forecast period.
No market study, other than that which would be provided in the appraisal, is required for projects
with 90% or more project based rental assistance.
B. Executive Summary. All market studies must contain an Executive Summary with a concise summary
of the data, analyses and conclusions, including the following:
1. a description of the site and the immediate surrounding area;
2. a summary of the project, including the proposed targeted population;
3. summary statements describing the condition of the economic, demographic and competitive
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environment;
4. a statement of key conclusions reached by the analyst; including but not limited to the Net Demand
and Effective Demand for the subject, and forecast average annual change in the number of
households for a specified period of time;
5. a summary of competitive advantages and disadvantages, and issues that will affect the project’s
marketability, performance and lease-up, as well as points that will mitigate or reduce any negative
attributes;
6. The number of units currently under construction in the development pipeline;
7. a statement of the analyst's opinion of market feasibility of the project; and
8. recommendations and/or suggested modifications to the proposed project, if appropriate.
C. Description of the Proposed Project. The market study must include a thorough description of the
proposed project, including:
1. The number of units by type and size with information on the number of bedrooms and bathrooms,
structure type, square footage, etc. Actual (paint to paint) size should be noted as well as the size
in published brochures or other media.
2. The proposed contract, utility allowance and resulting gross rents by unit type. (Gross rent is
defined as the cost of renting the unit, including the cost of resident paid utilities.)
3. Description of any income or rent restrictions imposed on the project by the use of public
financing and/or subsidies (e.g., LIHTC, tax-exempt bonds or subordinate loans). Identify any
project-based rental subsidies to be offered, specify the number of subsidized units, the type and
form of the assistance, and rent levels related to market rents.
4.
Utility policy in terms of which costs are paid by the tenant and which costs are paid by the
owner/landlord.
5. The unit features, project amenities and services and associated cost.
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6. For rehabilitation projects provide:
a.
Description of the proposed scope of rehabilitation including a breakdown of hard and soft
costs, if available.
b.
An estimate of total construction cost and cost per unit.
c.
Identification of the existing unit mix and rents including any existing housing subsidies.
Current and proposed rents should be compared.
d.
Current and historical (if available) occupancy information.
e.
An analysis of the current rent roll (if available) to determine if existing tenants will remain
income qualified and/or able to afford the proposed rents.
7. The project location in terms of:
a. Characteristics of the neighborhood in relation to schools, transportation,
shopping, employment centers, social and community services, etc., to include a study of the
adequacy of the public facilities that will service the site. The report must include a map
showing the site and important neighborhood facilities and amenities.
b. Any other locational considerations relevant to the market and marketability of the proposed
project.
c. A conclusion concerning the suitability/appropriateness of the site for the proposed use.
8. Other Characteristics, if any, of the proposal that will have a specific bearing on its market
prospects and overall marketability.
D. The Primary Market Area (PMA) is the geographic area in which units with similar characteristics,
e.g., number of bedrooms and rents, are in equal competition. The location of the competing projects
and where the majority of the residents be derived from must be discussed. The size of the PMA for
general occupancy rental housing can vary significantly depending on the extent and location of
comparable and competitive products within a specific area and geography. In some cases, both a
primary and secondary market area must be defined. When defining the boundary of a market area,
the analyst should consider the locations of comparable and competitive rental developments (existing,
under construction and developments in planning) and commuting times from employment. Data on
place of work or residence, population from the Decennial Census, American Community Survey
(ACS), private data services and local sources will aid in this determination.
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The market area analysis must include the following:
1. A legible map of the PMA, showing delineated boundaries, location of the subject, major
highways and thoroughfares, geographic features like rivers and lakes, and political divisions such
as state lines and city limits. The map must have a title, bar scale, north arrow and legend.
2. A description of the geographic boundaries of the PMA and a justification for the delineation,
including a discussion of the location of competitive housing, relevant services and amenities and
concentrations of employment opportunities.
E. Economic Context. The market study must include a thorough description of the current and forecast
economic characteristics and conditions of the PMA, county, "micropolitan" or metropolitan area
(whichever is applicable). The description is necessary to provide background and justification for
the subsequent demographic analysis and estimates of demand for additional rental housing. A
discussion of current economic conditions and employment characteristics must be discussed,
including:
1. Identification of growth sectors in the economy and emerging trends, including a detailed
discussion of the sectors in the economy that have a major impact on the local housing market,
such as military facilities, colleges and universities, federal and state government, major employers
or tourism.
2. A study of recent trends in employment, including unemployment statistics, new job creation or
loss, with a detailed discussion of: Historical nonfarm and resident employment levels and
changes;
3. Any anticipated changes in employment as a result of expected closings, openings, expansions or
cutbacks by leading employers, with a particular emphasis on how this would affect the rental
market during the forecast period, including any seasonal employment markets.
4. Information on the types of jobs being created and lost, including data on pay scales and how these
wage levels relate to the affordability of the proposed rental units.
5. List of major employers in the PMA, the type of businesses and the number employed.
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6. In relevant markets (such as resort areas), comment on the availability of affordable housing for
employees of businesses and industries that draw from the PMA.
7. A forecast of employment for the specified forecast period and how this forecast supports demand
for additional new rental housing.
F. Demographic Analysis. The market study must include a thorough description of the current and
forecast demographic characteristics and conditions of the PMA and a comparison secondary market
including a detailed explanation of all significant trends and changes.
1. Recent trends in population and household growth from the most recent decennial census, current
estimates and growth projections over the next 5 years covering such subjects as population
change, migration, net natural change, household growth or decline, changes in the average
household size.
2. For senior communities, current and projected senior household base with 55+ and/or 62+
householders.
3. A thorough discussion of past building trends in comparison to household trends.
4. Characteristics of the current household base, including family type, current and change in tenure,
age distribution and household type and rent burden.
5. Current income characteristics of the population and income by tenure.
6. For senior communities, tenure breakdown, income characteristics and rent burden of senior
households.
G. Current Housing Market Conditions. The market study must include a comprehensive description of
the current conditions of the rental market and of the sales market, in the PMA, if relevant. This
description should include a summary statement on the current condition of the overall rental market
and of the rent levels in the market of comparable projects, looking at both market rate communities
and affordable units/communities. If appropriate to analyze, subsidized communities in which tenants
are not responsible for all rent being charged should be discussed separately from market/affordable
communities.
The analyses should include the following:
1. An estimate of the current competitive rental inventory of both single-family and multifamily
units in the PMA, with data on the number of units by structure type, number of bedrooms, rent
levels, year built and location.
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2. A thorough discussion of recent market trends analyzing the following:
a.
Current vacancy levels and recent trends in occupancy/vacancy in existing rental projects.
Occupancy levels should be reported for market rate as well as affordable communities,
and/or age restricted communities, if applicable.
b.
Absorption experience of recently completed rental developments, including estimates at a
project level of per unit per month absorption rates, with particular emphasis on
comparable and competitive projects that have entered the market within the past 24
months.
c.
Current effective rents for comparable and competitive projects, reflecting incentives and
utility policies. A discussion of rent trends in this inventory during the past 24 to 36
months. The description should identify any services included in base rents or offered at a
premium. Where relevant, the report should include information on the extent of rent
concessions or similar incentives, particularly in projects in initial occupancy and must
address the impact of concessions on rent levels and whether the quoted rents are
overstated due to concessions or other factors.
d.
Estimated current overall rental vacancy rate and vacancy rate for units similar to those in
the proposed project. Significant seasonal variations in vacancy rates, if applicable, should
be discussed.
e.
Discussion of any vacancy or absorption problems in the market, particularly in the
segments of the market most relevant to the subject project.
f.
The impact, if any, of the single family and condominium market conditions, including an
analysis of the cost to rent versus to own, and the impact of foreclosures and of the shadow
inventory of single family and condominium units.
3. The report must include a map showing locations of existing competing rental projects, projects
currently under construction, and those in the planning and development process.
4. If appropriate, analyze inventory, occupancy levels, and waiting list of deeply subsidized
communities in the PMA.
H. Characteristics of Rental Units in the Pipeline, Under Construction and in Planning. The market study
must include separate estimates of the numbers of rental units currently under construction and the
numbers in the planning and development process likely to enter the housing market during the
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specified forecast period. These estimates should include all rental developments known, not solely
those determined by the analyst to be comparable and competitive. The description of the pipeline
activity should clearly identify any significant characteristics of specific developments with rent
restrictions or rent limits such as LIHTC or age-restricted occupancy. The report should contain
estimates of:
1. The number of projects currently under construction, the total number of units, the numbers by
bedroom size (number of bedrooms) by rent range, structure type and amenities (if available).
2. The number of projects in planning stages that are likely to be developed, including but not
limited to those with building permits or firm financial commitments, including details on the
number of units by bedroom size, rents, locations, and stage of development.
3. A list of LIHTC projects in or near the market area that are not yet placed in service, giving as
much known detail as possible on estimated placed-in-service dates, unit mix and income
levels to be served.
4. For senior proposals, a list of all existing and anticipated senior projects within or near the
market area, including characteristics such as type of age-restriction (55+ or 62+), number of
units by bedroom size, income restrictions (if applicable), location, rents, and any features,
amenities, etc. included with the rents. For future projects, as much known detail as possible on
estimated placed-in-service dates should be included.
5. A map locating all proposed communities.
I. Demand Estimate and Analysis.
1. Net Demand Analysis: The market study must include an estimate of future demand for the
specified forecast period, typically 36 months. The estimate of demand must be based on a
calculation of incremental demand (i.e. demand for additional new units) and must address the
following factors:
a. Renter household growth during the forecast period.
b. Recent trends in tenure broken down by homeownership and rental that may
increase/decrease the demand for rental units. (e.g. households shifting from renter to
owner tenure).
c. Replacement of existing rental units lost from the inventory due to demolition, conversion,
shifting of owner units into the rental market and by other means.
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d. The effect of any current excess vacant supply, based on an estimate of the balanced
market vacancy rate.
e. The study must reconcile the number of units in the proposed project with the demand
estimate for the PMA, taking into consideration current housing market conditions,
available vacancy, and forecast additions to the supply (planned and under construction).
2. Effective Demand: The estimate of "effective demand" is the pool of households with
sufficient incomes and/or applicable household size that would be expected to demand such
housing during the forecast period, including the income levels and rent- to-income ratio(s)
assumed in the study. Evaluation of Effective Demand includes an analysis of Capture Rate
and Penetration Rate:
a. Capture Rate is defined as the percentage of qualified households in the PMA that the
property must capture to fill the units and achieve stabilized occupancy. Qualified
Household is defined as households that meet any applicable age and household size
restrictions and are within any limiting income eligible band such as LIHTC Income Limits
and who have sufficient minimum income to pay the proposed rent without being rent
overburdened, The Capture Rate is calculated by dividing the total number of units at the
property by the total number of households that meet the applicable age and any income
band requirements.
b. Penetration Rate is defined as the percentage of Qualified Households in the PMA that the
property and similar existing and proposed competing properties must capture to fill all
units and achieve stabilized occupancy.
The Penetration Rate is calculated by dividing
the total number of units in the competitive inventory (including the subject property and,
current and proposed relevant competitive properties) by the total number of households
that meet the applicable age and any income band requirements.
c. For subsidized communities, sensitivity affordability and penetration rate analyses should
be conducted both with and without project based rental assistance.
3. The evaluation of Net Demand and Effective Demand should take into consideration:
a. The current and anticipated supply/demand conditions in the overall rental market;
b. The potential depth of the market of income eligible households in comparison to the
number of units at the proposed rents; and
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c. The marketability of the proposed units taking into account the project's amenities, rents
and location relative to comparable and competitive projects and other available housing
options.
4. For LIHTC projects: Provide an estimate of demand, including capture and penetration rates,
based on potential income-eligible residents. An income-eligible resident is one whose income
does not exceed the maximum permitted by the affordability restrictions but who has sufficient
minimum income to pay the proposed rent without being excessively rent-burdened. Note:
households are considered "rent-burdened" if they are paying more than 30 percent of their
household income in gross rent ("severely rent-burdened" if they pay more than 50 percent).
The market study must describe what basis is used for rent-burdened: e.g., 30 percent, or some
other percent, but in all cases less than 50 percent. To make these determinations, consider the
following information and guidance:
a. The market study should specify the applicable LIHTC maximum rents, markets rents, and
impact on achievable rents and project-based subsidy rents.
b. When the proposed rents are set at the LIHTC maximums, the market of income qualified
residents for the restricted units is comprised of a relatively narrow band of income-eligible
renters whose incomes do not exceed the maximum but are sufficiently high to pay the rent
without being rent-burdened. This can result in problems with the market feasibility of the
project. Depending on income and rental market conditions in the area, there may not be a
sufficient number of potential renters who meet the income limit and are also able to afford
the restricted rent. In many markets, LIHTC project rents need to be set below the
maximum permitted.
c. Some LIHTC projects include additional types of assistance (such as Section 8 rental
assistance or various forms of subordinate financing) which further reduce the effective
rents and thus expand the pool of potential income-eligible residents. The market study
must identify the estimated number of households who are eligible but are not excessively
rent-burdened when paying gross rent (including utilities).
d. The determination of demand and capture/penetration rates should take into consideration:
i. the current and anticipated supply/demand conditions in the overall rental
market,
ii. the potential depth of the market of income-eligible households in comparison
to the number of units at the proposed rents, and
iii. the marketability of the proposed units taking into account the project's
amenities, rents and location relative to comparable and competitive projects
and other available housing options.
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The Regional Center/Satellite office staff should consult with EMAD in assessing the
determination of eligible income band, capture rate and absorption rate contained in the market
study. Projects with insufficient demand for the units at the proposed rents should be rejected.
J. Findings and Conclusions.
1. Project Evaluation: Evaluate the subject property within the context of the site, economic,
demographic and competitive characteristics. Comment on the strengths and weaknesses of the
proposed project in terms of location, project size, unit breakdown, unit sizes, amenities,
features and rents.
2. The absorption rate is defined as a projection of the pace of unit lease up as units become
available for occupancy. The study should also include an estimate of the absorption period
needed for the project to reach sustaining occupancy based on current market data and the
quantitative and qualitative demand estimates.
3. The market study must include an assessment of the impact the proposed project will have on
existing rental developments. Specifically, the study must address the impact on existing
insured properties and show if sufficient demand will be derived from new renter households,
the shifting of households into the rental market, or the replacement of lost or sub-standard
units. It must be demonstrated quantitatively that the number of units under construction and
the proposed supply, including the subject, will not create over-supplied or overall soft market
conditions. Even if the subject does not directly compete with existing insured or uninsured
properties, an oversupply of units could spill over into all segments of the market.
4. For age restricted properties, the market analyst must describe the intended occupancy regime.
The MAP Lender’s underwriter narrative must ensure that the analysis and owner’s intent
based on their representations comply with FHA program guidance and Fair Housing law.
K. Additional Requirements/Guidance for Income Restricted Projects. According to USPAP Advisory
Opinion 14:
“Subsidized housing may be defined as single- or multifamily residential real estate targeted for
ownership or occupancy by low- or moderate-income households as a result of public programs and
other financial tools that assist or subsidize the developer, purchaser, or resident in exchange for
restrictions on use and occupancy.” While HUD provides the primary definition of income and asset
eligibility standards for low- and moderate-income households, other federal, state and local agencies
define income eligibility standards for specific programs and developments under their jurisdictions.
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The competency required of appraisers and market analysts to appraise or prepare market studies for
subsidized housing extends beyond typical multifamily residential experience and requires an
understanding of the various programs and definitions involved in the particular subsidy program
applicable to the development. Practitioners should be capable of analyzing the impact of a particular
subsidy program in both the general market and the local subsidized housing submarket. Political
changes may affect these requirements and therefore must be fully understood.
L. Data, Estimates, and Forecast. The study should document the methods and techniques used to
develop all estimates and forecasts and provide relevant and current citations on the sources of all data,
estimates and forecasts. Conclusions in the study must be consistent with the facts presented; findings
and recommendations should be based on a reasonable forecast of market supply/demand conditions
and sound assumptions regarding capture rates, absorption, achievable rents, income affordability and
similar factors. To the extent possible, the qualitative and quantitative estimates of demand for
additional rental units should take into account the changes in renter households by household size, not
just in total. Although data for all household sizes may be used, a study of the trend of change by
household size may derive a more representative and accurate demand estimate consistent with the
characteristics of the target market.
7.6
Appraisal Requirements
A. The Development of the appraisal must comply with USPAP Standards Rule 1, the Scope of Work
Rule and assignment conditions outlined throughout this guidebook. The report shall be in a narrative
format, comply with USPAP Standards Rule 2, and contain all of the information necessary for loan
underwriting and for the reviewer to easily understand the reasoning employed by the appraiser.
Standard Rule 2 does not dictate the form, format, or style of real property appraisal reports. The
form, format, and style of a report are functions of the needs of the client and intended users. The
substantive content of a report determines its compliance.
B. Effective Date. For pre-applications, all appraisals must have an effective date within 120 calendar
days before the date of the pre-application package. For Firm Commitments, the effective date of the
appraisal must be within 180 calendar days prior to the issuance of the Firm Commitment. The MF
Regional Center/Satellite Office may require an updated appraisal prior to an amendment, re-issuance
or an extension of the Firm Commitment, e.g., if there is a material change in the terms of the
mortgage or in the market conditions and market data upon which the Firm Commitment was based.
Expired reports may be amended or updated as needed by re-surveying all relevant data. HUD defines
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the effective date as the most current date that the appraiser inspected the subject, and comparables
and developed estimates of rents and expenses. Updated appraisals can be submitted if the appraiser
re-inspects the exterior of the subject project, re-surveys the rental comparables, and reviews the
market for any additional sales comparables. USPAP Advisory Opinion 3 should be followed for
guidance on completing and reporting appraisal updates. Lenders should provide for updates in their
response to the invitation letter in case of processing delays prior to issuance of the Firm Commitment.
The Regional Center/Satellite Office has the authority to waive the 180 day requirement or decrease
the amount of time until expiration of the report depending on market conditions.
The Department recognizes that occasionally there may be situations where the Inspection Date and
Effective Date may differ but there should not be a significant difference between the Inspection Date
and the Effective Date. While in the course of preparing the appraisal report, new market information
may become available that has a material effect on the results of the appraisal. This should be noted in
the appraisal report. If there are questions, the Regional/Satellite Office (not HQ) should be consulted.
C. Brevity. The appraisal report should be clear and concise. The appraiser should reference in the body
of the report conclusions derived by the analysis of large tables of data and the actual data should be
included as an addendum. Verbatim quotations of large portions of published national and regional
reports should be avoided Appraisals must be submitted as a searchable PDF file with one signed hard
copy.
D. Complex or Unusual Appraisal Assignments. When an appraisal assignment involves a subject with
property rights issues or other unusual circumstances, third party appraisers must be sure to comply
with USPAP Standards Rule 1-1(a), “In developing a real property appraisal, an appraiser must be
aware of, understand, and correctly employ those recognized methods and techniques that are
necessary to produce a credible appraisal.” When these issues occur, the lender and appraiser (if
identified) should consult with the Regional Center/Satellite Office at a concept meeting before
appraisal assignment begins.
E. Form HUD-92264 and supporting forms HUD-92273, HUD-92274, and HUD-92264T (if applicable)
must also be prepared and included in the report.
F. The USPAP Jurisdictional Exception rule is not generally applicable in HUD appraisal assignments.
Nevertheless, the USPAP Jurisdictional Exception Rule clearly states that if an applicable law
precludes compliance with any part of USPAP, then that part of USPAP becomes void for that
assignment, including administrative rules such as the MAP Guide and HUD Notices.
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G. Occupancy Percentage. Unless otherwise noted, the occupancy used in the valuation of properties for
acquisition or refinance should be based on the occupancy that is prevalent for the subject’s area. This
is reflected in Criterion 3 on the form HUD 92264-A. The underwriters may need to use more
conservative (lower occupancy/higher vacancy) rates to comply with FHA program guidance in sizing
the debt service constrained mortgage comparisons. The estimate of occupancy should take into
account the historical performance of the subject and the vacancy and collection loss typical for the
subject’s market area to determine the occupancy percentage. The appraiser should ignore
unsustainable market conditions and short-term spikes in the occupancy rate due to seasonal changes
and short-term demand for specialized employment, e.g. disaster relief workers.
H. Sections 220, 221(d), and 231 (new construction only) do not call for an “as complete” value
conclusion. The Department considers valuation work for these assignments to be an appraisal that is
developed and reported in compliance with USPAP Standards 1 and 2.
1.
By statute, FHA Multifamily new construction programs are replacement cost limited mortgages
and require a valuation of the land, a debt service analysis and a cost approach to value. An
estimate of the market value after completion is not required or relevant. The appraiser must fully
examine the proposed construction costs of the subject project. The map lender’s Appraiser must
present analyze and support the cost approach based on the plans, specifications and development
costs using either a subscription cost service such as Marshall & Swift, the lender’s third party cost
analyst or a direct comparative analysis of recently completed similar developments. Substantial
Rehabilitation projects require an estimate of the “As Is” value of the project (as opposed to only
the land) by use of the income and direct sales comparison approaches to value when possible.
Unoccupied or “shell” structures may be appraised using the sales comparison approach and/or
cost approach.
NOTE: The Section 231 Sub Rehab Program is an exception – those projects require both a cost
and “as repaired” value limit mortgage.
For apartments that are occupied, the primary method to determining value is the Income
Approach. The value should be what the typical purchaser would pay for the income stream
currently associated with the subject on its actual condition, occupancy and considering rent
restrictions. The as-is value must not be based on after rehab projected income or any advantages
that will accrue as a part of the transaction.
NOTE: See special instructions for Cost Certification as it relates to As Is Valuation in Chapter
13.21.
2.
Exhibits. The appraiser and the MAP Underwriter must assure that there is sufficient narrative and
exhibits to allow a reliable underwriting decision to be reached. This should include, but is not
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limited to, location maps, photographs of the subject, rent and expense comparables, site and floor
plans, along with thorough explanations of all adjustments.
I. For Section 223(f), apply all three approaches to value for subjects that have an actual age of less than
ten years. The appraisal for the 223(f) refinancing should assume market value for purposes of
developing Criterion 3, and should further assume that any proposed repairs/improvements have been
completed, as rents, expenses and value must reflect completion of any proposed repairs or
improvements. Not all repairs/improvements will result in an increase in value. Structural repairs,
utility line improvements or other repairs that do not directly result in an increase in market share or
would not result in a resident’s willingness to pay an increased rental amount will likely not increase
value. Any proposed rental increase must be demonstrated by market data.
1. Cost/ Summation Approach. The cost or summation approach must consider all applicable forms
of depreciation, functional and external obsolescence. The cost/summation approach shall not
automatically set the upper limit of value for these programs. The appraiser should provide a final
reconciliation of the three approaches to value, and consider the basic principle of substitution in
that no prudent purchaser would pay more for a project than the cost to acquire a similar site and
construct improvements of equal desirability and utility. This approach may be eliminated at the
discretion of the appraiser for subjects that are ten or more years old.
2. Sales Comparison Approach. In multifamily housing, the entire project as a whole typically does
not offer a convenient basis for comparison with other entire projects due to differences in size,
composition, areas, units and rooms. In such cases, acceptable units of comparison are price per
living unit, price per room, and price per square foot of gross building area (GBA). Appropriate
adjustments should be made and justified.
3. Income Approach. The annual net operating income (NOI) remaining after the payment of
expenses is considered to be the primary source of value to the project. The preferred method of
capitalizing the NOI into a value estimate is Direct Capitalization. There are several acceptable
techniques for deriving capitalization rates. Rate Extraction based on recent (preferably within the
past year) comparable sales is the most preferred. Band of Investment should be considered and
may be acceptable. The appraisal should also contain discussion of how the chosen capitalization
rate compares to rates listed in published reports such as Price Waterhouse Cooper realtyrates.com,
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etc. Discounted Cash Flow Analysis may be used only in certain situations involving leaseholds.
See Chapter 7.16.
The Capitalization Rate must be based on factors reflecting the overall demands of knowledgeable
investors in properties similar to the subject. Regardless of the method used in deriving the rate; it
must be supported by current market information, i.e. recent sales, typical loan terms and return on
owner’s equity. The Capitalization Rate developed and applied by the appraiser must reflect actual
investment expectations as of the appraisal date. The appraiser must report all market comparables
used to derive the Capitalization Rate.
Underwriters may need to adjust the rate used in securing the mortgage so land values reflect FHA
program requirements but should not adjust the appraisal or the appraiser’s value conclusion. For
example FHA does not permit a Capitalization Rate lower than the mortgage debt service constant.
Similarly, the underwriter may need to use a more conservative valuation to reflect the disparity
between a temporary but unsustainable “heated” market over the long term amortization of an
FHA insured loan.
All three approaches must be internally consistent in order to achieve a reliable estimate of market
value.
J. For Section 231 Substantial Rehabilitation cases, follow the instructions for Section 223(f).
Substantial rehabilitation under Section 231 differs from Sections 220 and 221(d)(4) in that a market
value based on the completion of the rehabilitation is required.
K. Remaining Economic Life (REL). HUD Multifamily Housing programs allow for long term
amortization periods. Accordingly the HUD Underwriter must determine the REL and the remaining
useful/physical life based on review and reconciliation of the appraisal, CNA, recommendations from
the appraisal review, and their own observation. This estimate is not a strictly formulaic calculation.
REL is defined as the estimated period during which improvements will continue to contribute to
project value and an estimate of the number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal. For new construction and substantial
rehabilitation projects, the maximum mortgage term is the lesser of 40 years, or 75 percent of the REL.
For existing properties, the maximum mortgage term is the lesser of 35 years, or 75 percent of the
REL.
When used in this section, the words and terms below are defined as follows:
1. Physical Life. The period from the time of completion (as new or after substantial rehabilitation)
of a structure until it is no longer fit or safe for use or when maintaining the building in a safe,
usable manner is no longer practicable. Because a building is subject to physical deterioration and
obsolescence, its period of usefulness is limited. As a building deteriorates or becomes obsolete,
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its ability to serve useful purposes decreases and eventually ends. This may occur gradually or
rapidly.
2. Economic Life. The period over which improvements to real property contribute to property
value. Economic life can never be longer than the physical life, but may be shorter. Both Physical
and Economic life will be affected by the underlying construction quality, market incentives, level
of maintenance/updating to correct physical deterioration and/or functional obsolescence.
3. Functional Obsolescence. Reduction in the usefulness or desirability of the improvements to real
property due to the presence of outmoded features such as lack of closet space or the number of
bathrooms commensurate with the number of bedrooms. Such features are often not curable and
may or may not be relevant in evaluating the REL.
4. Effective Age. The apparent age of the improvements to the real property, which may vary from
its actual or chronological age. The effective age is determined by the appraiser assuming the
required repairs to be made as specified in the CNA as a condition of refinancing and based on the
following factors:
a. Workmanship, durability of construction and the rate with which natural forces cause physical
deterioration;
b. The physical condition and probable cost of maintenance and repair, the maintenance policy of
owners and occupants and the use or abuse to which structures are subjected;
c. The economic background of the community or region and the need for accommodations of the
type represented;
NOTE: racial, ethnic or other demographic characteristics of Fair Housing Act protected
classes may never be taken into account when conducting an appraisal.
d. The relationship between the property and the immediate environment, the architectural design,
style and utility from a functional point of view and the likelihood of obsolescence at
attributable to new inventions, new materials and changes in tastes;
e. The trends and rate of change of characteristics of the neighborhood and their effect on land
values.
5. Remaining Economic Life (REL). REL is the Economic Life less the Effective Age. The
effective age is determined by the appraiser based on the actual condition of the subject
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considering all applicable forms of depreciation. The appraiser should assume the required repairs
to be made as specified in the CNA as a condition of refinancing and consider the type and quality
of construction, maintenance factors, and any other relevant market and economic factors that
might influence the long term success of the project.
Examples that illustrate the implementation of these concepts:
An older structure with functional obsolescence remains competitive in an area that is
dominated by modern apartment projects commanding higher rents.
Such structure could be a market rate project in a particularly desirable location, or a former public
housing project. The MAP appraiser's market analysis indicates that there is a lower income
population in the market area that will likely allow the project to remain competitive for a long
term. This can cause the effective age to be lower, with a commensurate increase in REL.
A structure that is sound and in good physical condition with many years of physical life
remaining may have reached the end of its economic life - if its remaining years of physical
usefulness will not be profitable.
Apartment projects in a given market area have either been severely damaged or destroyed by a
hurricane. Most of these properties are either being replaced by new structures or are receiving
substantial renovation that will include correction of functional obsolescence. This could result in
a lower effective age with a corresponding increase in REL.
L. HUD is the regulatory enforcement agency identified in the Confidentiality Rule of USPAP.
Appraisers will be required to present their entire work file and fully disclose the identity and source
of confidential information should the Department determine a review of the appraiser’s work file is in
order. (Note that, per USPAP, disclosure to enforcement agencies does not constitute a violation of
the Confidentiality Rule.) The appraisal must be prepared with the list of information contained in
Appendix 4.
M. Include an appraiser’s Certification with the format in Chapter 11 as well as the most current USPAP
certification.
N. Inspection of the Subject and Comparables. The primary appraiser designated by the lender and
accepted by HUD must physically inspect the subject (both exterior and interior) and all of the
comparables used as part of the analysis. The primary appraiser must also sign the Certification within
the appraisal report and the supporting HUD forms.
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a. The primary appraiser must inspect at least one of each bedroom/unit type. The total number of
units inspected must equal or exceed 5% of the total number of units for projects of up to 200units, or 4% of the total number of units for projects greater than 200-units. If the characteristics
and/or condition of the subject indicate that a higher level of inspection is necessary, it is the
appraiser's responsibility to expand the scope of the work may be necessitated by the observations
made by the primary appraiser during the inspection of the subject. This is especially important
where the improvements are high-rise structures and individual units within the building
demonstrate varying degrees of light and view qualities. If there are hazardous conditions or other
factors that preclude a thorough inspection of the interior, the appraiser must clearly indicate these
circumstances in the appraisal report.
b. For large projects exceeding 500 units, the lender may permit a lesser percentage but reasonable
number of units to be inspected by the appraiser. In addition, the appraiser may employ assistants
to inspect individual units so as to encourage a thorough inspection. The names and qualifications
of these assistants must be disclosed in the appraisal report. The assistants are not required to sign
the report.
c. The primary appraiser must inspect all of the comparables used in deriving and estimate of value,
including land comparables (if applicable), improved comparables sales, expense comparables and
rental comparables. The appraiser must verify the condition of the comparables with management
or other personnel familiar with the project whose contact information must be documented in the
appraisal report.
O. Required Appraisal Report Exhibits. Photographs (subject, and all comparables including rentals),
regional map, location map, satellite scans (if available from Google, Bing, etc.), flood hazard map,
survey (if available), floor plans (for each type of unit being offered - if available), site plan, zoning
map, tax map, land sales comparable map, rental comparable map, and improved sales comparable
map are required with all submissions.
P. Market Analysis Requirements for Multifamily Appraisals. The appraisal must also contain,
depending on the complexity of the project and prevailing market conditions, a Level B or C Market
Analysis of the local market with an emphasis on multifamily housing so as to determine the ability of
an existing project to continue usage as multifamily housing. In the case of proposed construction or
substantial rehabilitation, the purpose is to determine overall feasibility and demand for new housing
units. A brief outline of a Level C analysis follows:
a. Location. This includes a general description, specific analyses of site linkages and urban growth
determinants and detailed competitive location rating.
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b. Demand Analysis. This includes a discussion of general evidence of sales/leasing activity, general
city/area growth trends, market absorption, demand and need forecast based on population,
employment and income and a demand forecast of the subject market segment.
c. Competitive Supply Analysis. This includes vacancy rates for comparables and from market
surveys (secondary data), field research on all competitive and proposed properties, building
permit analysis, identification of proposed sites, and a detailed competitive amenities rating.
The detailed requirements for performing a Level B or C analysis can be found in “Market
Analysis for Real Estate”, published by the Appraisal Institute. In general, a stable market
evidenced by a recent sales, and balanced supply and demand is an indication that a lower level
“B” analysis will be sufficient. If there is uncertainty in determining the level of analysis, the
lender and appraiser should jointly consult with the Regional Center or Satellite Office.
7.7
Estimating Project Income
A. Rental estimates. The appraiser must estimate the annual gross income of the subject project including
estimates of income from market comparables, rental concessions, and an assessment of the general
health of the rental market. The gross income estimate assumes a full occupancy level and reflects
rent levels current as of the appraisal date or date of the market study. Also, consider the effect that
any proposed repairs to the project will have on rents, expenses, and net income; however not all
repairs will increase rents, occupancy, net income, and/or decrease expenses.
Rent comparables. Market rent by comparison shall be estimated by the appraiser and documented on
the Form HUD-92273 or Form HUD-92273-S8 if the appraisal is also being used as a Rent
Comparability Study (RCS). A separate Form HUD-92273 is to be prepared for each type and size of
rental unit in the subject project (if significantly different).
Market rents attributed to the subject property should not be speculative. If rents are based on levels
achievable assuming that proposed repairs are completed, then those units that have had repairs
completed and are leased are most reflective of market or near market rent levels. The rent
comparables and units selected for comparison must be as similar as possible to the subject project and
units as to location, structural type, number of bedrooms, and average unit size. In order to ensure
they are truly comparable and competitive with the subject project, appraisers should generally not use
rent comparables located outside of the subject’s market area, but should be from areas similar to the
subject and should be fully explained in the report. Market rate units from partially assisted projects
can be used as rental comparables in the absence of better rental data.
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B. Adjustments. Consistent adjustments for significant differences between the comparables and the
subject units shall be derived from the market and applied to the subject rent estimate and fully
explained. Rental adjustments are always made to the comparables reflecting differences with the
subject project.
C. The appraiser should select the final rent estimate based on the comparables that are the most similar
to the subject in location, size, style and desirability. In situations where the appraiser gives the
greatest weight to the highest or lowest comparables, the appraiser must explain and substantiate with
market data why the chosen comparables are the most reliable. Often the best comparables are those
that require the least amount of adjustment. Just as the most appropriate rent comparable must receive
more weight, the general health of the rental market must be recognized before relying upon one or
two optimistic indicators.
D. On LIHTC and/or bond financed projects, the Form HUD-92264T must be completed to determine the
appropriate processing rents.
E. Trending of Rents. Rental estimates shall be made as of the appraisal or market study date and may not
be trended to a future date. Since rent estimates are made based on street rents currently being
obtained by the comparables, no time adjustment is needed for an estimate as of the appraisal or
market study date. Estimate GPI based on in-place rents at the subject property as evidenced by
current rent rolls.
F. Equipment included in Rent. Equipment included in the subject rent such as ranges, refrigerators,
microwave ovens, air conditioning equipment and laundry facilities must be identified. Services
included in the subject rent frequently include heat, air conditioning, water, and trash removal, and
must also be identified. Comparable project equipment and services must correspond to the same
items of equipment and services provided in the subject proposal and the adjustment process must
reconcile any differences. This analysis also applies to the analysis of expenses.
G. Occupancy/Vacancy and Collection Losses for Residential Units. The appraiser must establish a
factor for vacancy and collection loss when determining the effective gross annual income for the
residential units. The factor must consider both historical and current data (applicable for existing
properties) of the subject project, the rental comparables and any anticipated changes in the market.
The factor selected must reflect long-term occupancy rates that are expected to continue. The estimate
of occupancy should be based on the actual occupancy of the subject without regard to programmatic
constraints imposed on the maximum underwritten occupancy when calculating debt service coverage.
The estimate of occupancy should take into account the vacancy and collection loss typical for the
subject’s market area and, if applicable, be consistent with the subject’s historical performance.
In all cases the appraiser should use income from actual operations and market conditions in
determining value. In sizing the loan for purposes of debt service, the underwritten vacancy rates will
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be the greater of the minimums below and actual levels, however these minimums may be used to
develop market value if deemed appropriate by the appraiser.
Minimum
Vacancy
and
Collection
Loss Rate
3%
5%
Property Type
•
•
•
•
•
Properties with HAP contracts covering 90% or more of the units; or
In-place rehab with
Occupancy at or above 90%, and
90% or more of the units set aside as LIHTC units, and
Attainable Tax Credit rents at least 10% below market (i.e. a
“discount” to market).
•
Properties with 80% or more of the units set aside as LIHTC units,
and
Attainable tax credit rents at a 10% discount to market.
•
•
7%
•
LIHTC properties with any percentage of units set aside but without a
10% discount to market; or
Properties in which 20% or more of the units are Market Rate.
H. Project Rent Concessions. Rent concessions in comparable projects must be included in the analysis and
an appropriate adjustment made to the subject rent based on the comparable units. The adjustments must
reflect the actual impact on gross annual income resulting from the comparable rental concession.
I. Occupancy. When the occupancy rate in a comparable project is significantly less than the long-term
occupancy rate estimated for the subject, a downward adjustment should be made to the comparable’ s
rent. If other factors such as condition have had an effect on occupancy, care should be taken to avoid
excessive and duplicative adjustments for interdependent factors. The appraiser must note the actual
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market derived commercial vacancy/occupancy rate in the appraisal report. However, the appraised value
of the commercial space component for acquisition/ refinance or the underwritten net operating income
(NOI) for new construction/substantial rehabilitation projects must assume either the lesser of what is
indicated by market or the occupancy limitations of the specific program.
J. Utilities/Services. All of the items for consideration under this heading refer to the cost of the services of
water, sewer, gas and electricity that may be included in the rent. In some cases, even though both the
subject and the comparable units have the same service included in the rent, an adjustment may still be
warranted to bring the comparable in line with the subject, due to size, equipment, utility rate, type of
utility, etc. If included in the comparable rent, but not in the subject, enter a negative adjustment reflecting
that portion of the comparables rent attributable to the inclusion of the service. If excluded from the
comparable rent, but included in the subject rent, enter a positive adjustment reflecting the estimated
increase in rental value attributable to including the service in the subject’s rent.
K. Project Location, Amenities and Other Factors Consider the subject location relative to distance from
shopping, recreational, social, and medical and employment centers, neighborhood desirability,
transportation, special hazards and nuisances.
1.
“Other” items that may be considered include but are not limited to, the following:
a. Livability–reflect good or poor unit design and configuration, including room sizes, layout
adequacy of closets, lighting, elevators and laundry facilities, etc.
b. Condition of improvements–reflect lack of maintenance, soundproofing, etc.
c. Parking–reflect parking rates, adequacy of parking for visitors, proximity of parking to the
units, inclusion/exclusion of parking space with unit rental, etc.
d. Project density–consider open space or crowding of units, if the degree of either is such that
it would affect the level of attainable rental.
e. Unit location–reflect features of location of a unit within the project, such as view, proximity
to swimming pool, tennis or other recreational facility, and/or other similar factors.
2. Generally, only high-rise elevator comparables are to be compared with the subject elevator high-rise
proposal. Mid-floor level rents of the comparables are compared with the mid-floor level of the subject
project. Adjustments for heights of the comparables above and below the mid-floor level of the subject
also must be made, as indicated by the market.
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L. Other Income.
1. Ancillary Income. The appraiser may consider other income based upon the operating history of
the project and whether these sources of income are common in the market. Other income might
include but is not limited to recurring and reliable sources such as laundry facilities, parking,
equipment rental, vending machines, and cable fees The appraiser can consider the net amount of
this other income based on the actual or projected (as appropriate) amount received, adjusted for
vacancy and income loss. The analysis must be discussed in the Remarks Section of Form HUD92264.
2. Short-Term Lease Premiums. Projects with lease terms that are less than 30 days are not eligible
for HUD-insured financing under any circumstances. Income from other short-term leases may be
considered to the extent that it exists in the local market. There must be a thorough discussion of
the prevalence of short-term leases in both the appraisal and underwriting summary. The amount
of the premium is the difference between the rent for a unit with a term that is typical for the
market (generally one year) and the rent for a short term lease. This premium is resident-related
and is treated as ancillary income. Units with short term leases do not require a separate Form
HUD-92273, but the rental amount must be based on market information.
3. Corporate Leases. Corporations and businesses are eligible residential residents in insured
projects, so long as the lease term exceeds 30 days although compliance with the policy on ShortTerm Lease Premiums is required and the number of units subject to the leases does not exceed
10% of the units. For underwriting and valuation purposes, the percentage of total gross income
obtained from corporate leases shall not exceed 10%.
4. Pool, Pet Fees/Rent. These fees may be recognized based on operating history and prevailing
market conditions. For existing projects (223(f) and occupied substantial rehabilitation) the
greatest weight should be given to operating history. For new construction cases, any projected
income from these fees must be supported by hard data and a thorough discussion of competing
and comparable properties.
5. Ineligible Income. Ineligible income should be noted and discussed in both the narrative appraisal
report and the remarks section of the Form HUD-92264. There is no prohibition on this category
of income but it cannot be included in the income calculation for the purposes of determining
value or the maximum insurable mortgage. Ineligible income includes the following:
a. Interest Income. The appraiser must not include in the calculation of income any interest
income, including interest on reserves.
b. Ineligible Fee Income. Non-recurring and non-regular income that is not reliable may not be
included in the calculation of income. Examples may include, but are not limited to forfeited
security deposits or forfeited rent. Reliance on a forfeited security deposit or forfeited rent
may be common due to management practices in a project or market, but will not be
recognized by HUD/ FHA on either the valuation or underwriting.
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c. Furnished Units. Furnished units must be underwritten at the same rental rate as unfurnished
units. This applies to all units, including those having corporate and short-term leases. For
valuation purposes, furnished units can be valued based on the prevailing market conditions.
d. Non-Shelter Services/Elderly Developments. Refer to Section 3.1.O.5.
6. Commercial Income. Where commercial facilities are included in a mixed-use project, a separate
analysis must be made of the effect that the commercial operation will have on the project. The
appraiser must calculate income, vacancy and collection loss, operating expenses, and replacement
reserves attributable to commercial space separately from the residential space. Project paid
resident improvements must be accounted for as a leasing expense, and if applicable, a separate
commercial-space operating deficit must be calculated in addition to the required residential
operating deficit.
7. The term "Commercial" is applied to any space or facility permitted and acceptable for
"Nonresidential Use" from which income is derived or anticipated. Income from residents for the
use of facilities such as community rooms and parking are not considered commercial even though
fees may be collected. This income is considered ancillary income and is treated separately from
commercial income. However, income from non-residents related to parking or other community
facilities must be treated as commercial income and is subject to the restrictions on the
underwritten occupancy rate as noted in Chapter 3.
8. The space occupied by parking and community facilities is not included in the calculation for
allowable commercial space. Non-tenant parking income from commercial parking spaces
reserved for use by motorists who are not project residents or are not parking to use the on-site
commercial tenant’s facilities must be included in the Commercial Space and Income limitations.
The income and space attributable to parking spaces reserved for non-residential or noncommercial tenants must be included in the limitations, based on applying the percentage of the
total spaces that are reserved for non-tenant use. For existing properties that provide parking for a
monthly fee and are to be acquired, refinanced or will undergo substantial rehabilitation, the lender
must identify the percentage of monthly parkers who are non-tenants so as to include these in the
commercial income limitations. The maximum occupancy factor to be applied to the parking
income attributable to parkers who are not associated with either the project’s residential or
commercial tenants shall be the lower of:
a. The amount indicated by the market and by the historic performance of the subject; or
b. 50 percent.
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NOTE: For proposed construction, or where new commercial parking facilities are to be
constructed, the demand for this parking must be addressed in the market study, appraisal and
underwriter’s narrative.
If the borrower operates a parking facility that provides parking for residential or commercial
tenants of the project, the lender must determine underwritten parking income based on an analysis
of the past 3 years of operation and the trailing 12 month period prior to application.
If the parking facility is operated by a third-party, the lender may use the amount of income
collected under the contract if it is a fixed monthly payment. Parking contracts that specify a
percentage rent in addition to or in place of a fixed rent are not permitted without a waiver.
A separate analysis must be performed for each type of space using the Form HUD-92273 or a
similar format to summarize appropriate adjustments to comparable data. These studies can be
incorporated as a separate section in the overall residential market study submitted at the preapplication or firm stages, depending on the program requirements, and must also comply with
Appendix 7A. Care must be taken in reviewing the allowable square footage and income
percentage attributable to the commercial/office space since these requirements vary by program.
See table below:
Commercial Space and Income Limitations
SOA
Maximum
Percentage of
Rentable Area
221(d)(4) and 231
25%
220
25%
223(f)
25%
Allowable Maximum
Allowable
Total Net Percentage of Effective Gross
Income
15%
30%
20%
For all programs except Section 223(f), the maximum underwritten commercial occupancy rate
shall be the lesser of: a) that indicated by the market, or b) 80 percent. For Section 223(f), the
maximum underwritten commercial occupancy rate shall be the lesser of: a) that indicated by the
market, b) the actual occupancy rate of the subject, or c) 90 percent. For special instructions related
to the maximum underwritten occupancy rate for non-tenant parking income see Section 7.7.M.2.
M. Limited Waiver of Commercial Income and Space Limits.
1. Commercial Income Limits. Regional Center Directors may issue waivers of the commercial
income limits in Section III B, above, so long as the amount does not reflect a property that is
primarily commercial rather than residential. Commercial income for NC or SR programs greater
than 20% of the effective income should use the 220 program rather than a waiver of the 221(d)(4)
limit. The Regional Center Director’s approval must document that the project’s commercial
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component will contribute to meeting the Department’s Strategic Plan Goals, including promoting
sustainable communities or supporting transit-oriented development. If the lender requests a
waiver of the commercial income limits, HUD may require that the request be supplemented by a
complete credit analysis of all existing or pre-leased commercial tenants. Waivers may be granted
where there are clear mitigating circumstances that justify such a waiver. Examples include but are
not limited to:
a. A long-term lease with a credit-worthy tenant, such as a government agency or a large, wellestablished corporation;
b. A multi-tenant commercial space where most of the tenants have a long history of occupancy
(5 or more years) and full occupancy of this space is not needed to provide a break-even cash
flow for the project; or
c. There is substantial borrower equity and/or local government funds that mitigate risk.
2.
Commercial Space Limits. Regional Center Directors may issue waivers to exceed the
commercial space limits in Section III B, above. In order to justify a request to waive the
commercial space limitation, the owner must demonstrate:
a. that the additional space will not negatively impact on the use of the project by its residential
tenants and will not create a nuisance to the surrounding community, so as to create a situation
where the project is no longer residential in nature;
b. there is ample market support to assure occupancy of the space within the projected absorption
period; and
c. any issues involving easements, liability insurance, parking and zoning must be resolved prior
to granting the waiver.
N. Unlike the valuation of the residential portion of a mixed use project, the appraiser must value the
commercial portion of the project, by applying the programmatic income and space limitations
used to establish the commercial NOI for calculating debt service coverage (see Chapter 3).
1. The appraiser must: Conduct a complete analysis of at least three commercial income and
expense comparables and provide a photograph, the resident’s name, type and address of
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business, square feet, rent, vacancy, any concessions and major lease terms for each
comparable.
2. Provide data to support the subject’s commercial vacancy rate in relation to the market
commercial vacancy rate and review the rollover risk and cost of resident improvements to release space. Use a vacancy factor of not less than 10% for Section 223(f) and 20% for Section
221(d) and Section 220 new construction or substantial rehabilitation to obtain effective gross
commercial income for underwriting purposes.
3. Provide the term, commencement date, expiration date, and name of the resident, square
footage, and calculation of gross rents, expenses, reimbursement of expenses, cancellation
clauses, and renewal clauses for each lease.
4. The project expense estimate must include all commercial expenses payable by the project
owner. The analysis of all commercial income and expenses must be reflected on Form
HUD-92264 with all the supporting data attached to the form. The expense estimate must
include all commercial expenses payable by the owner. The analysis of all commercial
income and expenses must be reflected on Form HUD-92264 with all the supporting data
attached to the form.
7.8
Operating Expense Estimates and Underwritten Net Operating
Income (NOI)
A. Purpose. The appraiser shall determine the costs to maintain, operate and repair the project and to
defray the costs of ownership. An accurate analysis of operating expenses is essential to determining a
realistic net income estimate.
Appraisers must use either the form Form HUD-92274, Operating Expense Analysis Worksheet, or an
alternate format to develop project expense estimates to be included in for Section E of Form HUD92264, Project Income Analysis and Appraisal. If an alternate format is used (e.g. to trend by line
item), to be consistent with the expense treatment on the HUD-92264, it must contain the same level
of detail as the Form HUD-92274. Form HUD-92274 will be prepared for all cases and must be
included in the processing file as supporting documentation for Form HUD-92264.
Market expenses attributed to the subject should not be speculative and should bear some reasonable
relationship to the project operating history, understanding that some savings in operating expense line
items may be gained when proposed repairs are completed. An example of savings might be reduced
utility expenses based on the installation of certain energy-efficient features. Reduced real estate taxes
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based on a new assessment classification would also be justification for estimating operating expenses
lower than indicated by the project-specific operating history.
B. Sources of Expense Data.
1. For new construction projects, operating expenses must be estimated on the basis of comparable
projects.
2. For existing projects, for both valuation and debt service, operating expenses must be adjusted on
the basis of comparable projects, but will primarily be based on the past 3 years of operating
experience for the subject project. In addition, the lenders should provide trailing 12 months of
income and expenses for the appraiser to compare to the historical statements.
a. The most current year project financial statement must have a third party CPA or IPA review.
Owner certified financial statements may be submitted for the years prior to the last full Fiscal
Year. Any owner-certified financial statement or owner-certified balance sheet and operating
statement must include the following acknowledgment:
“WARNING: 18 U.S.C. 1001 provides, among other things, that whoever knowingly and
willingly makes or uses a document or writing containing any false, fictitious, or fraudulent
statement or entry, in any matter within jurisdiction of any department or agency of the United
States, shall be fined not more than $10,000 or imprisoned for not more than five years, or
both.”
b. Exceptions. For refinance transactions where the project may not have been under the current
ownership for the 3-year period, financial statements for the entire 3 years may not be
available. This is particularly true for bankruptcies or the acquisition of defaulted properties.
Also, in purchase transactions, not all the required information may be available for reasons
beyond the purchaser’s control. In these situations:
i. The borrower must submit a statement through the lender that explains why all the required
records cannot be obtained.
ii. The lender must also certify that they have evaluated the borrower’s statement and agree
that the information is not available.
The Regional Center Director may waive the requirement for past 3-year period financial
statements. However, the borrower must submit the project financial statements that are
available including an owner-certified year-to-date balance sheet and operating statement.
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3. All projects must be analyzed as independent operations and must not reflect shared expenses from
nearby projects under the same management, including shared insurance premiums. If the nearby
project should be subject to foreclosure, the subject project would be adversely affected, thereby
constituting an unacceptable underwriting risk. For the same reason, estimated expenses must
reflect typical long-term operation and must not reflect a specific sponsor or management entity
whose operation would not be typical.
C. General: Operating expenses are periodic expenses needed to maintain the project and to continue the
production of effective gross income. For appraisal purposes, an operating statement that conforms to
the above definition of operating expenses may differ from statements prepared for accounting
purposes. Current or historic statements must be prepared on a cash basis. It is important to verify the
accounting basis for the operating statement, since project operating expenses for appraisal purposes
must be reported on a cash basis. Typical categories of expenses are as follows:
1. Fixed Expenses. Fixed expenses are those that generally do not vary with occupancy and have to
be paid regardless of whether the project is occupied or vacant, and generally do not fluctuate
greatly from year to year. Real estate taxes and insurance costs are typically included as fixed
expenses.
2. Variable Expenses. Variable expenses are operating expenses that vary with the level of
occupancy or the intensity of project operation. Operating expenses for large properties frequently
list many types of expense variables, but typical broad categories include the following:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
Management charges
Utilities – electricity, gas, water, sewer charges
Heating and air conditioning (HVAC)
General payroll and security
Cleaning expenses
Maintenance and repairs
Decorating
Grounds maintenance
Exterminating
Trash removal
Miscellaneous (supplies, etc.).
3. Reserve for Replacements. This reserve category provides for the periodic replacement of the
building components that wear out more rapidly than the building shell itself and must be replaced
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periodically during the building’s economic life. These components may include but are not
limited to roof covering, carpeting, plumbing fixtures, appliances and HVAC. The estimate of the
reserve for replacements should be based on reserves that are typically collected for comparable
properties in the subject’s market area, without regard to FHA programmatic requirements and
formulas used for determining the required replacement reserves when calculating debt service
coverage. The appraiser must document the research conducted to make this determination. The
MAP Lenders underwriting narrative must address any variance between the market reserve cost
use on the appraisal and the FHA required deposits included in the underwriting.
4. Total Operating Expenses. Total operating expenses for residential properties are the sum of the
fixed expenses and variable expenses updated to the appraisal date, plus the reserve for
replacements.
5. Commercial Facilities. Where commercial facilities are included in the subject project, a separate
analysis must be made to determine the effect that the commercial operation will have on the
project expense estimate.
D. Estimate of operating expenses by units of comparison. Items of expense shown under each
comparable and the expense items applicable to the subject proposal must be expressed as suitable unit
of comparison–such as expense per unit per annum (PUPA), expense per room per annum (PRPA),
and expense per square foot of net rentable area per annum (PSFPA), or percent of effective gross
income. The expense comparables and units selected must be as similar as possible to the subject
project and units as they relate to the subject location, structural type, number of bedrooms, and
average unit size.
For consistency purposes, expense components must be expressed in the same units of comparison so
that the expenses for the subject proposal can be totaled. However, if the unit of comparison for a
specific component is different from the basic unit of comparison for the other expense items, this
different unit of comparison must be explained in the expense narrative. The dollar amount of the
expense item can afterwards be converted to the same unit of comparison selected for the other
expense components. Additional documentation must be submitted, as needed, for all component
estimates that are not self-explanatory.
E. Expense Comparables. All insured properties used as expense comparables must be identified and
disclosed in the appraiser’s Form HUD-92274, expense analysis and in the appraisal, except as noted
below.
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1. General Requirements. All comparables (confidential and disclosed) must be representative of the
physical and location-specific characteristics of the subject project. Appraisers must always
present the best comparables available for their analysis and must refrain from repeatedly using the
same disclosed comparable merely to meet the disclosure requirement.
2. Confidential Expense Data. The appraiser may include confidential expense comparables in the
expense analysis, however the analysis must include at least one fully identified and disclosed
expense comparable to serve as a benchmark. Confidential expense data sources must be disclosed
to HUD review appraiser upon request (and subject to confidential requirements similarly imposed
on licensed HUD review appraisers). Appraisers may only use confidential expense comparables
that are supportive and consistent with the fully disclosed comparables used in the analysis. When
submitting confidential expense comparables, the appraiser must redact only the minimum amount
of information necessary to protect the confidentiality of their client. The city, state, and general
market area within the city must be disclosed unless this information would clearly identify the
comparable and thus breach the appraiser’s confidentiality requirement. The project description,
unit mix, and the physical characteristics of the comparables’ units must be disclosed. It is
unacceptable for the appraiser to base conclusions on confidential expense comparables that are
not supported by the fully disclosed comparables used in the analysis.
3. Review of Insured Expense Comparables. The HRA will compare the FASS or OPIIS systems file
for the insured expense comparables used by the appraiser to confirm the data. In order to
accomplish this, the HRA will combine the following accounts: Acct. No. 6263T, Administrative
Expenses (subtract Acct. No. 6203, Conventions and Meetings, and 6370, Bad Debts), Acct. No.
6400T, Utility Expenses, Acct. No. 6500T, Operating and Maintenance Expenses, and Acct. No.
6700T, Taxes and Insurance.
F. Expense Adjustments. Project expenses must be expressed in the same units of comparison in order to
ensure accurate adjustments and correct reporting of expense estimates. Consistent adjustments for
significant differences between the comparables and the subject units shall be derived from the market
and applied to the subject expense estimate.
The appraiser must enter the dollar amounts attributable to significant differences between the subject
proposal and each of the expense comparables–such as for physical characteristics, equipment,
services provided, the level of management furnished to residents and any differences in rates between
tax and utility jurisdictions. The appraiser must correlate the comparable expense for each component
which is applicable to the subject project.
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G. Updating Procedures. Appraisers must not trend expenses to reflect a time adjustment from the
effective date of the most recent expense comparable to the anticipated date of project occupancy
following construction and initial endorsement. Instead, expense estimates must be effective as of the
date of the appraisal and must reflect the same year of operation.
The appraiser may use a factor expressed as a percentage to adjust expense comparables up to the
same date as the most current expense comparable in order to make a more creditable comparison.
However, if all of the expense comparables have data from the same operating year, no adjustment for
updating is necessary.
Adjusting expense data is a two stage process, as follows:
First, the oldest comparables are updated to the date of the most recent comparable, so that all
comparable data is representative of the same effective time period. Second, after updating the
comparables to the same effective time period, the line items are correlated and the subject’s expense
estimate is updated to the date of the appraisal.
1. The most current comparable is entered in the first column on the HUD 92274. This comparable
serves as the benchmark for updating the remaining comparables.
2. The effective date of the operating expense data is always the beginning date of the operating year
For example, the beginning date of a financial statement dated January 1st to December 31st is
January 1st of that year. If the financial statement fiscal year ends June 30, 2000, the beginning
date is July 1, 1999.
3. Other than the first comparable being the most recent, the remaining comparables do not
necessarily need to be in chronological order.
4. The appraiser must enter the comparables itemized expenses as reported on audited, reviewed or
certified financial statements. Per unit expenses or per square foot expenses are treated similarly:
a. The actual expense amount must be entered in the first column, without any adjustments.
b. Once the adjusted per unit expenses are determined for each comparable, the subject project’s
expenses are then correlated from the array.
c. Once the correlated line item expenses for the subject project are determined, they are added
and updated to the date of the appraisal.
d. The correlated subject expenses are updated based upon the beginning date of the expense
period of the most recent (the benchmark) comparable. HUD may request from the appraiser
the names and addresses of any confidential expense comparables used in the expense analysis,
pursuant to the Confidentiality sub-section of the Ethics Rule, along with Standards 3.1.e and
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3.2.f of the USPAP. If the appraiser still refuses to provide this information, the HRA may
request additional non-confidential comparables.
H. The expense line items included in the Section E. of HUD-92264 should be consistent with the
individual line items as updated, on the HUD-92274.
I. Underwritten NOI and General Programmatic Guidance. The following general guidance should be
used by underwriters. Assumptions that raise underwritten risks should be stress tested against worst
case scenarios and should be evaluated by the underwriter.
1. Occupancy Standards. Projects must have an average physical occupancy rate of at least 85%.
For market rate properties, the maximum underwritten economic occupancy rate is 93%. For
affordable 1 properties, refer to the Section 7.7G.
2. Projects must demonstrate a pattern of stable physical occupancy, i.e. the average occupancy
standards noted above, for a period of six months prior to submission of the Firm Commitment
application, and maintain that average occupancy through to the date of Initial/Final Endorsement.
Continued occupancy consistent with the underwriting conclusions must be documented with an
updated rent roll no more than 30 days prior to closing.
3. The Borrower must submit an updated, certified rent roll detailing the occupancy level at the
project. The rent roll must be dated no more than 30 days prior to endorsement. If HUD determines
that the updated rent roll shows a significant change in occupancy from that submitted at the time
of application and that was assumed in the loan approval, then any Commitment issued shall be of
no force or effect and will be cancelled by HUD.
4. Operating Expenses will be stabilized based on the previous three-years operating history where
available. Operating expenses, as evidenced by the three year operating history may require
adjustment if capital expenditures (normally considered a reserve for replacement item) have been
paid out of the operating budget. Additionally, adjustments to management fee may be made
provided a new management contract is executed which reflects a different percentage of gross
collection. Adjustments to real estate taxes may be permissible if there is an anticipated tax
reduction based on reassessment or reclassification. Annual deposit for the reserve for
replacement will be based on either the formula method or the estimate made by the needs assessor
in the Capital Needs Assessment.
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5. Exceptions: Set forth below are exceptions to developing NOI for underwriting Criterion 5 (debt
service):
a. Projects with units assisted under a Section 8 HAP contract subject to marking down to market
or having short terms will size the debt service mortgage at the lower of either:
1. Market rents as estimated by the third party appraiser, or
2. Section 8 HAP rents
b. Projects that will have Section 8 HAP contracts with above market rents assured for a long
term may amortize the additional debt within Criterion 5 (debt service approach) based on two
tranches, an A and B piece.
1. The A piece will be determined by underwriting to the market rent levels
over the entire term of the mortgage.
2. The B piece will be underwritten as the difference between the market rents
and the higher Section 8 rents over the remaining term of the HAP Contract.
c. First-time refinance of a 202 direct loan. Criterion 5 may use the Section 8 HAP rents (even if
they exceed the market). Actual project expenses, as evidenced by the three-year operating
history as stabilized, will be used. This assumes that these projects are not subject to
restructuring under Mark to Market and that no equity will be extracted in the transaction based
on above market rents.
d. Re-refinance of projects which previously had Section 202 direct loans will use the twotranche method described above. These projects are no longer subject to mark to market under
MAHRA at the next HAP contract renewal exemptions.
e. Tax Increment Financing (TIF): The TIF income may be underwritten as a second tranche for
the term of the TIF only to the extent the offset request NOI is guaranteed or refinanced to
obtain anticipated benefits and the TIF would unquestionably not result in a default. The
underwritten narrative must provide a complete explanation of the TIF and stress test analysis.
f. Low Income Housing Tax Credit Projects (LIHTC). Debt Service rents will be the lower of
market or tax credit restricted rents unless there is a Section 8 HAP contract that covers the
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LIHTC rental units. In the case where there is a Section 8 contract and the tenants will pay no
more than the tax credit restricted rents for their portion of the rent, then the lower of market
rents or Section 8 rents will be used.
g. Energy/Utility Efficiencies. Up to 75% of projected savings from energy/utility efficiencies
may be underwritten if the projection is based on the CNA e Tool and/or an ASHRAE Level II
energy audit, and if the proposed scope of work includes the energy/water efficiency upgrades
used in the projections.
See Table in Appendix 7 – Criteria for Loan Sizing, for a summary of Exceptions.
7.9
Site Analysis
Key analyses for consideration of site acceptability for a proposed project are as follows:
A. Analysis of Location. The analysis of location involves a determination of the desirability and utility
of the site, probable future neighborhood trends, the pattern of project and neighborhood
improvements and rents in the area.
B. Specific Location. Consider the specific site in relation to neighborhood and city-wide physical,
social, and economic influences, limitations of use imposed by zoning or deed restrictions,
development trends, stability, decay and rehabilitation, availability of utilities, services, and
appropriateness of the intended use. Review and analyze the various influences which affect its
market and income potential, including a review of the crime rate in the area, its impact on the project
and how the impact, if any, can be addressed through design or staffing. Racial, ethnic or other
demographic characteristics of Fair Housing Act protected classes may never be taken into account
when conducting an appraisal. No decisions should be made based on pre-conceived notions about
characteristics of the area based on the demographics in lieu of statistics. (For further guidance,
consult USPAP Advisory Opinion 16, “Fair Housing Laws and Appraisal Report Content”).
C. Civic, Social and Commercial Centers. Consider the sufficiency of community facilities as they relate
to the needs of residents of the proposed project. A location for a multifamily project must be
adequately served by elementary and secondary schools, neighborhood shopping centers,
transportation, churches, playgrounds, parks, libraries, hospitals, and theaters and other appropriate
services.
1. Schools. Accessibility to schools will be judged by the transportation time required, rather than by
walking distance alone. Thus, if school bus service will be provided and the time involved is
reasonable, the location may be acceptable even if schools are not within walking distance. School
capacity is the responsibility of the community and a project that is otherwise feasible will not be
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rejected because the local schools are considered overcrowded, unless it can be proven that
marketability is adversely affected.
2. Neighborhood Shopping Centers. The convenience of shopping should be judged on the basis of
time rather than distance. The importance of grocery, drug, and other neighborhood shopping
facilities to be within a reasonable walking distance will be heightened based on the number of
residents who do not have private transportation.
3. Religious and Recreation Centers. Ready access to religious and recreation centers is desirable.
Projects designed for large families have a greater need for playgrounds and active recreation areas.
Adequate on-site provisions for playgrounds and other recreation amenities must be incorporated into
the proposal where adequate facilities are not in close proximity to the project site and available for use
by occupants.
D. Transportation. Convenient transportation to places of employment, major shopping districts and civic
and social centers is a prerequisite to site acceptability. In those communities where local public
transportation is the principal means of commuting by the prospective residents, the location of a
project designed for such occupancy shall be within a reasonable walking distance to mass transit.
E. Special Hazards and Nuisances. Such conditions include unusual topography, subsidence, flooding,
unstable soils, unusual traffic hazards and noise, danger from fire and explosion, exposure to airport noise
and low-flying airplanes, smoke, chemical fumes, noxious odors, stagnant ponds or marshes, and sewage
disposal failure. Any of these, or similar conditions, if serious and infeasible to overcome, will cause a
specific location to be ineligible for mortgage insurance.
F. Parking Facilities. The lender and the third party reports must consider the impact that parking
requirements for the project will have on parking facilities in the neighborhood and on all-night
parking, including the availability of other off-street parking, if the project site lacks adequate parking
for residents. The loan proposal must estimate the number of parking spaces that would be required
and whether or not the proposed parking facilities will meet the estimated need of the residents and
their guests. Convenient access to reliable public transportation may in some cases mitigate parking
availability concerns.
G. Site Suitability. The site must be adequate in size, shape, exposure, and contour for the proposed
project. Building height limitation, project unit size and numbers, necessary on-site parking and play
areas must be considered.
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H. Sites/Projects Sold by a Public Body.
1. The site value of land in new construction is to be estimated using all applicable approaches to
value, as if the project were unrestricted and market rate.
2. The “As Is” value in substantial rehabilitation cases is to be estimated using all applicable
approaches to value based on the current operation of the project.
3. For both 1 and 2 above, no consideration will be given to:
a. Any additional value that may be attributable to subsidies available to the project or any
LIHTCs or other tax benefits the project will receive; or
b. Any value reduction due to any NOI or value limitations caused by regulatory agreements or
affordability restrictions imposed by any subsidy program or tax regulation. This valuation
methodology permits sponsors to acquire a project at its market value for new construction or
rehabilitation of affordable housing. The value attributable to the presence of LIHTCs
diminishes over time and is not always freely transferable, and thus should not be taken into
consideration.
NOTE: See special instructions for Cost Certification as it relates to As Is Valuation in Chapter
13.21.
4. The site value of land in new construction or the “As Is” value will be noted in the MAP
appraiser’s narrative report and in the Remarks section of the form HUD 92264. For the purpose
of developing the cost build-up in Section G of the form HUD 92264, the lesser of market value or
the acquisition cost will be entered in Section G. Line 74 (Total Estimated Replacement Cost of
the Project) is to be entered in Criterion 3 of the form HUD 92264-A.
5. Sites/Projects Sold by a Public Body. For underwriting purposes, where sites/projects are sold by
a public body to the developer for a specific re-use purpose, the value of land fully improved is the
lesser of:
a. The amount determined by comparison with other sites possessing the improvements and
amenities that the subject site will have upon completion.
b. The dollar amount paid by the purchaser under the purchase contract with the public body, plus
an estimate of any additional costs imposed by its terms or by the insurance program. Such
costs are those to be borne by the purchaser under the purchase contract including real estate
taxes and special assessments accruing from date of purchase to date of commitment, legal fees
incident to the land/project purchase, re-zoning costs, installation of certain designated off-site
improvements, razing structures and clearance of the site (after allowance for any income to
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the purchaser). This is not a complete list of items covered, but serves as a guide to the
acceptability of costs required by the purchase contract.
c. The actual values are noted in the MAP Appraiser’s narrative and in the Remarks Section of
the 92264.
6. “As-Is” Value of Land. HUD’s estimated value of land or project “as is” for cost certification may
include all of the items in paragraph 1.b above with the following exceptions: Installation of offsite improvements and cost of razing structures and clearing the site (less income received). This
is intended to avoid duplication of costs that might be reflected in the estimated value of land “as
is” and also allows for the sponsor to include them as separate items in cost certification which
includes both off-site costs and demolition. The dollar amount of the land purchase contract plus a
breakdown of the estimate of additional costs must be fully itemized and documented.
I. Site Value for Subsidized and/or LIHTC Projects: The site value is to be estimated using a
capitalization rate and project NOI as if the units and the project were unrestricted and market rate,
without considering: a) any additional value that may be attributable to subsidies available to the
project or to any LIHTCs or other tax benefits the project will receive, or b) any value reduction due to
any NOI or value limitations caused by regulatory agreements or affordability restrictions imposed by
any subsidy program or tax regulation. This valuation methodology permits sponsors to acquire
project at its market value for new construction or rehabilitation of affordable housing. The value
attributable to the presence of LIHTC’s diminishes over time and is not always freely transferable, and
thus should not be taken into consideration.
J. Warehousing of “excess” land area is not encouraged but where un-avoidable, it may be permitted but
may not be funded with insured mortgage proceeds.
7.10
Pre-Application Stage for Sections 220, 221(d) and 231
A. Lender’s responsibilities:
1. Based upon the market study prepared by the market analyst and the rental income and expense
estimates prepared by the appraiser, the lender is responsible for making the following determinations
before submitting the application:
a. Determine the current occupancy levels, market absorption rates and market demand for the
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number and type of units proposed.
b. Analyze site for acceptability.
c. Determine market rents reflecting amenities, services, equipment offered and estimate project
income.
e. Estimate total operating expenses.
f. Estimate mortgage amount based on form HUD-92264-A, Criteria 5, and Debt Service Ratio.
g. Make a determination of feasibility or non-feasibility of the sponsor’s proposal.
h. Evaluate the market study and appraisal report. The lender will either accept their conclusions
for use in underwriting, or may revise them for underwriting purposes. Any such revisions
must be explained and justified. The lender may adjust the appraised value downwards but
may not adjust it upwards. Once accepted by the lender, and submitted to HUD as part of the
lender’s application, the lender represents the findings and conclusions of the appraisal.
2. The Phase I ESA report must be prepared in accordance with Chapter 9 and the lender should
advise the market analyst and the appraiser of any conditions which might affect the marketability
or value of the project.
3. The appraiser or market analyst must prepare the market study in accordance with the requirements of
this Chapter.
4. The appraiser must determine project rents, estimated rental income, operating expenses the
warranted price of land or “as is” value (of land and buildings for substantial rehabilitation cases).
The lender must assure that the forms HUD-92273, Estimate of Market Rent by Comparison, and
HUD-92274, Operating Expense Analysis Worksheet, are prepared. For substantial rehabilitation
projects, the appraiser must estimate the rents and expenses based on the assumption that all
proposed substantial rehabilitation to the project has been completed and is used as the basis for
NOI in the debt service criterion. However, pre-rehabilitation rents and operating expenses must be
used for purposes of developing the cost build up and determining as-is value.
5. The lender must consider cost information from various sources, including the sponsor, appraiser, and
cost consultant (including soft-cost and land cost information) to calculate the total replacement cost
and will compare its estimate of total replacement cost with the costs estimated by the borrower.
6. Complete the forms HUD-92264, HUD92264-A, and supporting forms.
7. The lender must compare the calculations on the form HUD-92013 with those proposed by the
borrower and either accept the borrower’s proposal, recommend its modification, or reject it and
advise the borrower that the project is infeasible.
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Firm Commitment Processing for Sections 220, 221(d) and 231
(New Construction)
A. Lender’s Responsibilities:
1. Contract for an appraisal establishing the replacement cost for the project utilizing the cost
approaches in accordance with requirements found in Section 7.6. The appraiser will update the
rental and expense analyses provided in the Pre-Application.
2. The appraiser is also required to determine the “warranted price of the land” for new construction
projects and the "as is" value of the project for substantial rehabilitation projects. In addition, for
Section 231 substantial rehabilitation projects, the appraiser must also determine the “value fully
improved” of the project site.
3. The lender must forward or otherwise coordinate sharing information prepared by its cost analyst
and any soft-cost and land cost information provided by the sponsor with the appraiser for
assistance in the calculation of the total replacement cost.
In accordance with USPAP Standard 2-3, “When a signing appraiser(s) has relied on work done by
appraisers and others who do not sign the certification, the signing appraiser is responsible for the
decision to rely on their work. The signing appraiser(s) is required to have a reasonable basis for
believing that those individuals performing the work are competent. The signing appraiser(s) also
must have no reason to doubt that the work of those individuals is credible.”
4. The lender must assure that all applicable sections of the Rental Housing Project Income Analysis
and Appraisal, form HUD-92264, are completed in accordance with current policy, for the type of
project proposed.
5. Form HUD-92664 items to be calculated by the appraiser include:
a. Market rents and estimated income
b. Estimated total operating expenses
c. Total estimated replacement cost of the project
d. “Warranted Price of the Land” for new construction projects and the "As Is" value of the land
and building for substantial rehabilitation projects
e. Estimate of operating deficit and replacement reserve
f. Estimate of REL
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g. Estimate of Interest during Construction (line 53 in section g of Form HUD-92264), to be
calculated as the greater of:
1) By formula. The amount of the mortgage multiplied by 0.5, multiplied by construction
interest rate and multiplied by construction years. (Construction Years is the construction
time in months from line 52 in section G of the Form HUD-92264 plus 2 months, then
divided by 12).
2) Lender’s estimate (optional). The lender’s estimate of interest during construction must be
documented with a pro-forma draw schedule or its equivalent, subject to USPAP
Standard.
3) HUD’s HRAs have the option to modify appraisal conclusions internally or to return the
application to the lender for modification. See Chapter 11 Section 11.2 for review by MF
Regional Center/Satellite Office staff.
6. The lender must provide written explanations in the underwriter’s narrative of and major changes
to the pre-application invitation letter. Any inconsistency between the data reported on a form
HUD-92264 prepared by the appraiser and the lender’s HUD-92264 must be explained in the
Underwriting.
7.12
Firm Commitment Processing for Section 223(f)
A. Lender’s responsibilities:
1. The Underwriting Narrative must demonstrate that the MAP Underwriter performed adequate
due diligence in reviewing the appraisal which shall include a thorough discussion comparing
the appraiser’s market analysis to the conclusions from the market study, in cases where a
separate market study is required. There must also be a full discussion by the underwriter of
the approaches to value and the appraiser’s reconciliation and value conclusion.
2. The lender must state any reasons for disagreement with the appraisal report. The underwriting
summary should contain a thorough discussion of any differences between the value
conclusions made by the appraiser and those conclusions used in underwriting the loan. The
appraiser’s value conclusions may be adjusted downwards by the underwriter but may not be
adjusted upwards.
3. The appraiser must complete an appraisal of the project establishing market value utilizing the
cost, income, and comparable sale approaches. The Cost Approach may be eliminated at the
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discretion of the appraiser for subjects that are ten or more years old, although an estimate of
the land value must still be provided.
4. The appraiser should where practicable participate in the inspection of the project with the
Needs Assessor as described in Appendix 5G.
5. The appraiser must consider the eligibility of the project, confirm the project occupancy level,
and verify the owner’s rent roll during the inspection. When the appraiser has established that
the owner’s rent roll is correct, the actual occupancy, based on the owner’s rent roll must be
entered in the Remarks Section of Form HUD-92264. The appraiser must also determine
whether the apartments are furnished or unfurnished.
6. The appraiser must analyze the project for acceptability.
7. The lender must confirm that the Phase I ESA and narrative report is prepared in accordance
with all appropriate directives.
8. The lender must assure that the appraiser completed the forms HUD-92273, Estimate of
Market Rents and HUD-92274, Operating Expense Analysis Worksheet. This is based on the
determination made by the appraiser of the project’s income and operating expenses including
a review of the operating history of the project (rent roll and financial statements).
9. The lender must assure that all applicable sections of the Rental Housing Project Income
Analysis and Appraisal, form HUD-92264, are completed in accordance with current policy,
for the type of project proposed. HUD-92264 items to be calculated by the appraiser include:
a. Market rents and estimated income
b. Estimated total operating expenses
c. Total estimated replacement cost
d. “Warranted Price of the Land”
e. Market value of the project
f. Estimate of operating deficit and replacement reserve
g. Estimated and actual occupancy rate
h. REL
10. The data provided in the lender's HUD-92013 and HUD-92264 must be consistent and any
inconsistency between the data reported on a HUD-92264 prepared by the appraiser and the
lender’s HUD-92264 must be explained in the Underwriting Summary.
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11. The lender must assure that the Remarks Section of HUD-92264 contains the following
information:
a. The appraiser’s statement of actual occupancy, based on the owner’s rent roll.
b. The required amount of initial deposit into the Reserve for Replacement.
c. The estimated cost of required repairs as provided in the inspection report.
d. The estimated amounts for legal, organizational (if applicable), title and recording
expenses based on the maximum insurable loan.
7.13
Substantial Rehabilitation Processing for Sections 220,221(d)(4)
and 231
A. In general, a substantial rehabilitation project is processed in accordance with the instructions found in
Sections 7.10 and 7.11, except as noted below.
B. Form HUD-92264 must be completed in accordance with basic valuation instructions for Sections
221(d) and 220 processing, with the following modifications:
1. “As Is” Value. Development of the “As Is” value must be in accordance with the pertinent
requirements of Standards 1 and 2 and the applicable approaches to value. A supplemental
HUD 92264 is not required.
2. The forms HUD-92273 and HUD-92274 analysis used to support the income and expenses on
the HUD-92264 must reflect the “as completed” project conditions that will exist after
substantial rehabilitation has taken place.
3. A value for the land without improvements must be estimated and entered using the analysis
grid in Section H of the form HUD 92264.
4. The “as is” value and the value of the land without improvements must be entered in Section
“O” (Remarks) of the form HUD 92264.
C. Applicable Approaches - "As Is" Value in Substantial Rehabilitation. The estimate of “As Is” value of
the land and building before rehabilitation should be estimated by the direct market comparison
approach and the income approach to value. The “As Is” value by the residual approach is not
mandatory, but can be used in cases where there is a lack of market sales. This estimate of value
assumes an arm’s length transaction between the subject and a typical purchaser of the subject in its
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current state with respect to condition and income, including the current presence of a subsidized
income stream. To determine value based upon the income approach, the appraiser should use the
lesser of market rent or the income derived from any rental assistance contract, as applicable, to avoid
inappropriately inflating income and thereby the estimate of value. Moreover, the estimate does not
assume any advantages or disadvantages associated with the current sale or refinancing of the subject
that would involve issuance of tax credits or other development advantages.
NOTE: See special instructions for Cost Certification as it relates to As Is Valuation in Chapter
13.21.
D. Valuation Processing: (Sections 220, 221(d)(4)).
1. Determine the market value of the project "As Is". Complete the Location and Description of the
Project, Information concerning Land or Project, Estimate of Income, Equipment and Services
Provided in Rent, Estimate of Annual Expenses, Income Computations, and Income Approach to
Value, and Sales Comparison Approach to Value within the report. If the project involves
rehabilitation and new construction with additional land to be added, also complete a land
appraisal for that portion of the land to be added for the new construction portion of the
development proposal.
2. Use the Replacement Cost by Formula, Rehab Projects, with or without BSPRA, to find the total
project cost (summation estimate) using the "As Is" market value of the project, and the
rehabilitation cost estimate furnished by the cost analyst, plus carrying charges and financing.
3. Complete HUD-92264. In Section G, the "As Is" market value of the project before rehabilitation
will be shown on the line titled "As Is" value of project except as noted below.
4. "As Is" value of project acquired as a leasehold estate. Instructions for limiting the “As Is” value
of project before rehabilitation, when that project is acquired as a leasehold estate, are found in
Ground Leases, Section 7.16.
5. To find the project mortgage amount for Section 220 and Section 221, use the lower of Criteria 1,
3, 4, or 5 on HUD-92264-A. Estimate the "As Is" value of the project before rehabilitation, add
the total for all improvements plus soft costs to the As-Is Value to obtain the sum of the above
costs. Then multiply the sum of the project costs listed above by 90 percent based upon Criterion
3 to obtain the maximum project mortgage amount.
NOTE: Cost Certification instructions (set by Statute) dictate that the lesser of the “as is” value of
the land and improvements (before repair or rehabilitation) or the purchase price of the land and
improvements, is used in the cost build up for Criterion 3 of form HUD 92264A, in substantial
rehabilitation cases. Consequently when mortgage proceeds will be used to fund the acquisition of
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the project, the “as is” value estimation will be used as a test of the reasonableness of the
acquisition price.
When the acquisition price is less than the “as is” value of the land and improvements (as accepted
by HUD), and mortgage proceeds will be used to fund the acquisition of the project, the
acquisition price will be used in the cost build up for Criterion 3 forming the cost basis for the
Firm Commitment
When the acquisition price exceeds the “as is” value of the land and improvements (as accepted by
HUD), then the acquisition price must be reduced to the “as is” value and will, subsequently,
comprise the basis of the cost build up for the Firm Commitment.
When mortgage proceeds will not be used to fund the acquisition of the project, the “as is” market
value of the project will be used in the cost build up for Criterion 3 forming the cost basis for the
Firm Commitment. This is particularly significant when below market rent restrictions, (such as in
the case of LIHTC limited rents or Section 8 rent subsidy) are in place and the use of market rents
in valuing the project will result in a premium over these rent restrictions. (See Section 7.13 C,
defining how rents are derived as the basis for the “as is” value)
E. Valuation Processing for Section 231 Substantial Rehabilitation Cases. Section 231 substantial
rehabilitation cases requires two value estimates, a value subject to the completion of rehabilitation
using all applicable approaches, which shall be used in Criterion 3 of the Form HUD-92264-A, and an
“As Is” value entered in Section G, line 73b of the Form HUD-92264 to determine the Total
Replacement Cost of the Project, in a manner similar to the procedure used in Sections 220 and 221(d)
(4). Depreciation is not included. The value upon completion of the project should reflect that which
could be obtained through an arms-length sale. If rental restrictions exist and will survive post sale,
then the value will be based upon these limitations. Alternatively, if the restrictions terminate upon
sale, then the As-Is estimate would reflect the higher value. The “As Is” value is also used in
completing Criterion 6 of the Form HUD-92264-A.
If the Total Estimate Replacement Cost of the Project (Line 74 of Section G of the 92264) exceeds the
value after rehabilitation, the residual “As Is” value by formula must be completed. This amount must
be entered on line 73b of Section G, and Section G, line 74 will be considered to be the value of the
project after rehabilitation and this amount must be entered in Criterion 3 of the Form HUD-92264-A.
F. Valuation Processing for RAD Transactions. On RAD 221(d) (4) substantial rehabilitation
transactions, the appraiser should use the CHAP rents and historical occupancy and operating
expenses if available to set value.
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G. Contingency Reserves. To address unanticipated costs inherent in the rehabilitation of older
structures, there will normally be included in the mortgage amount a reserve for contingencies based
on the percentage of estimated rehabilitation cost without fees. This percent may range between 10
and 15 percent, depending upon the scope and type of rehabilitation and the experience and financial
ability of the sponsor, the borrower and contractor and on whether the contractor’s bid already
contains a reserve for contingencies. This percentage, determined by the cost analyst, must be
included as a separate line item in the estimate of replacement cost on HUD-92264.
H. Interest during Construction. Interest during construction in either new construction or substantial
rehabilitation (line 53 in section G of Form HUD 92264) must be calculated as the greater of:
1. By Formula. The amount of the mortgage multiplied by 50 percent, multiplied by construction
interest rate and multiplied by construction years. (Construction Years is the construction time in
months from line 52 in section G of Form HUD-92264 plus 2 months, then divided by 12).
2. Lender’s Estimate (optional). The lender’s estimate of interest during construction must be
documented with a pro-forma draw schedule or equivalent.
I. Inspection Fee. The inspection fee is calculated as half of one percent (0.5%) of the loan amount
when the project involves new construction. For substantial rehabilitation projects, the inspection fee
is calculated as the sum of Total for All Improvements (plus BSPRA, if applicable), times one half of
one percent (0.5%) rounded to the next higher $100.
J. Offsite costs. If there are any offsite costs associated with the rehabilitation, enter them as a line item
in the Estimated Replacement Cost. This separate entry is necessary in rehabilitation processing, since
the "As Is" value does not include offsite cost requirements.
K. Rehabilitation cost not attributable to residential use. This entry must be completed for all
rehabilitation projects and is prepared on Rehabilitation Cost Not Attributable to Residential Use,
found in the MAP Form Book, and transferred to line 4b under Criterion 4, Amount Based on
Limitations per Family Unit, HUD-92264A.
L. Developer’s Fee, when applicable. HUD may include in the estimated replacement cost of a project, a
nonprofit developer’s fee in addition to the legal, organizational and audit fees normally included in
the estimated replacement cost of a project.
1. The fee will be based on a sliding scale at eight percent of the mortgage, but not less than $40,000
or more than $400,000.
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2. Exceptions:
a. For mortgages in excess of $5,000,000 increase the maximum fee to provide an additional 2
percent based on that portion of the mortgage that is in excess of $5,000,000.
b. At the option of the nonprofit sponsor/borrower, the fee included in the replacement cost may
be reduced.
3. Part or the entire fee may be used to pay for transactional costs related to developing the subject
project including but not limited to:
a. Reduction of the estimated closing costs of the project
b. Staff salaries
c. Nonprofit working capital deposit
d. Relocation expenses
e. Operating deficit escrow
f. Financing fees above the 3.5 percent included in the estimated replacement cost of the project;
g. Environmental studies
h. Housing Consultant services provided by either in-house staff or contractor
4. Funds not used to meet the estimated cash requirements of the project will be released to the
nonprofit based on a percentage of completion method.
M. Items no longer included in the Estimated Replacement Cost of a Project. HUD will no longer include
in the estimated replacement cost of a project, an Allowance to Make Project Operational (AMPO)
and an amount for Housing Consultant services except as part of the developers fee noted above.
7.14
Calculating Operating Deficits
A. Estimate of a Project’s Operating Deficit. When it is anticipated that the project’s net income will be
inadequate to support the insured loan during the initial rent-up period, the appraiser must estimate the
anticipated project operating deficit, utilizing the following steps:
1. Estimate the total project operating expenses, add the debt service requirement (including
principal, interest and mortgage insurance premium (MIP)) and divide the total by the potential
gross income for the project. The resultant ratio is the break-even occupancy level. Multiply that
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percentage times the total project units to obtain the number of units required for break-even
occupancy (rounding up any fraction of a unit).
2. Estimate the total number of units expected to be occupied at the time of Final Endorsement. The
difference between the total units required for break-even occupancy and those occupied units at
the time of Final Endorsement represent the total number of units that must be rented in order to
reach a break-even occupancy level.
3. Estimate the likely rate of absorption of the available units, taking into account the current and
proposed supply of housing units in the subject’s market balanced against demographic and
demand considerations. The absorption or lease-up rate must be supported by comparison to
similar project’s historic rates of absorption during their lease-up period whenever such a
comparison can be made. The number of units to be absorbed, divided by the monthly absorption
rate, will yield the total number of months of the entire operating deficit period.
a. Absorption Period. The Absorption Period is the period of time necessary for a newly
constructed or renovated project to achieve stabilized occupancy. The absorption period begins
when the first certificate of occupancy is issued and ends when the last unit to reach stabilized
occupancy has a signed lease and is actually occupied by a resident. A typical pre-marketing
period begins about three to six months prior to the issuance of the certificate of occupancy,
therefore the month that leasing is assumed to begin should accompany all absorption
estimates. It is important to consider that the absorption of restricted/low-income units may be
different, depending on the differential in rent between low-income rents and market rents, and
the number of income-qualified potential residents in the HMA.
b. Maximum Allowable Absorption Period. As a result of risk mitigation guidance, the absorption
period used in estimating market demand for the proposed number of units has been reduced
from 24 to 18 months. Larger projects may phase additional units under a separate application
for mortgage insurance (e.g. under Section 241(a)). An exception to the 18-month absorption
period limitation may be waived by the Regional Center Director for large high-rise buildings.
Such projects will be evaluated based on their own merit and will require a larger initial
operating reserve to insure against the risk inherent in a longer absorption period.
c. Absorption Rate. The Absorption Rate is the average number of units rented each month
during the absorption period.
4. Because the deficit period can begin at certificate of occupancy and continue through the cost
certification phase and the amortization phase, there are three distinct expense intervals to consider
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when calculating the total deficit period, although not every project will require using all three
intervals.
Interval 1 covers the time between certificate of occupancy and the end of the construction period
and cost certification . (Note that the construction period is defined as construction time plus two
months for cost certification purposes). This is an optional interval, because some projects may
have the same certificate of occupancy and construction completion dates and thus would not need
an Interval 1. When calculating expenses for this Interval, no debt service is to be included as an
expense since the mortgage interest for this interval is included in the mortgage in Section G Line
53 "Construction Interest". Replacement Reserves and ground rent are not to be included in
Interval 1. This interval must only include the appraiser's estimate of all of the applicable
operating and leasing expenses for each month (period).
Interval 2 begins at the end of the construction period/cost certification process (construction time
plus two months) and ends at the beginning of loan principal amortization. This period can be no
greater than 2 months and is also an optional interval. (Chapter 8 Section 8.9.A.2. requires
amortization to begin "no later than 4 months after construction completion for insurance of
advances and first day of second month after final endorsement for insurance of completion
cases"). If amortization begins at the end of the construction period, this interval will not be
necessary. Debt service must include payment of interest and MIP, but not amortization, as the
beginning of amortization signals the beginning of Interval 3. (Section G Line 53 of the HUD92264 includes mortgage interest for the construction period plus two months. If amortization is
deferred until 4 months after construction completion, there will be two months of unaccounted-for
interest and MIP that must be included in the IOD). Ground rent must be included if the project is
a leasehold since only ground rent during construction can be included in the mortgage, and this
interval begins after construction completion. Replacement reserves are not included in interval 2.
This interval must include the appraiser's estimate of applicable operating expenses for each month
(period).
Interval 3 begins at the beginning of amortization. Amortized debt service is mandatory in this
interval, and must include payment to principal, interest and MIP. Ground rent, if applicable and
replacement reserves are also mandatory in interval 3. This interval must include the appraiser's
estimate of applicable operating expenses for each month (period). Interval 3 ends when NOI
becomes positive and is sufficient for breakeven coverage of the mortgage debt.
B. Operating deficits can occur before and after the start of amortization. The operating deficit
calculation for the first interval must begin when the Certificate of Occupancy is secured.
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C. If the dollar amount of debt service for a period is greater than the net income for that period, the
difference represents the estimate of the operating deficit. One period of positive income does not
cancel a prior period of income deficiency.
D. The operating deficit represents the total of all cumulative losses projected to occur before the project
reaches breaks even and produces a positive cash flow. These losses may not be offset by intermittent
periods of positive cash flow.
E. Where commercial facilities are included in the project, a separate operating deficit estimate of income
loss for commercial rent-up must be prepared. The appraiser must insure that expenses included in the
residential deficit estimate are not duplicated in the commercial space deficit estimate so as to unfairly
penalize the project. The commercial space deficit is added to the residential operating income deficit
to determine the total project operating deficit escrow funding that will be necessary. Any positive
income attributable to the commercial space during the deficit period will not offset the residential
operating deficit requirements.
7.15
Leaseholds/Ground Leases
A. HUD prefers to insure mortgages for a project owned in fee simple. For those transactions, in which
fee simple ownership is not practical and a leasehold estate is proposed, the leasehold estate must be
marketable. The underwriting and valuation guidance in this section applies. The MAP Lender’s
underwriting and appraisal analysis must fully describe the interest in a lease transaction and related
values.
HUD will consider a leasehold estate consisting of land and improvements. Changes to the standard
lease form addendum will only be considered where the owner/lessor is a public/government entity.
1.
When used in this section, the words and terms below are defined as follows: Fee Simple Estate.
Represents the entire ownership, from beneath the soil to the air above, enduring by inheritance
and indefinitely into the future, typically subject to taxation and eminent domain.
2.
Leasehold Estate. The interest of the lessee under a lease for a term of years. When the term of
the lease expires, all rights to possession and use revert back to the lessor/fee simple owner and
the leasehold estate terminates. A leasehold estate can involve both land only or land and
improvements.
3.
Lessee. Tenant and typically the single asset mortgagor entity or upper tier owner of the single
asset entity.
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Lessor. Owner of the ground and of improvements. Repays lease payments. May or may not
have Identity of interest with the lessee, and may or may not be an obligor under the regulatory
agreement.
Leased Fee. The interest of the lessor/fee simple owner during the period when the project is
under lease.
6.
Lease. Written contract between an owner (the lessor) and a resident (the lessee) with the
conditions under which the lessor will transfer the use of real project to the lessee in return for
lease payments or rent.
7.
Ground Lease. A long term agreement by which an owner of land (lessor) leases an unimproved,
site to a lessee for a term of years.
8.
Ground Rent. Payments on a ground lease and must bear a reasonable relationship to the value
of the site "As Is" (before construction of on-site or off-site improvements) unless the ground
lease is from a governmental agency which has made the ground lease available for a lower
ground rent to support the development of affordable housing.
9.
Leasehold Improvements. Improvements or additions to leased project that have been made by
the lessee.
10.
Gross Collections (or effective gross income). The annual amount collected from all sources,
less refunds.
11.
Operating Expenses (residential and commercial). Include items in accord with Generally
Accepted Accounting Principles except to the extent modified by HUD program guidance.
Operating expenses must include the annual amounts deposited to the Reserve for Replacement.
Operating expenses shall not include interest charges, or charges or allowances for depreciation
of real or personal project, or amortization of financing expense, or payments to any officer or
director of the corporation, unless such payments are for services at the project which are
necessary to the operation of the project.
12.
Taxes. Project taxes and special assessments. Taxes shall not include income taxes. Net income
before debt service payments shall mean the annual amount which remains after operating
expenses and taxes are subtracted from effective gross income.
13.
Debt service payments. The annual amounts paid to mortgage principal, interest, and MIP.
14.
Net cash flow. The annual amount remaining after debt service payments are subtracted from
net income.
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B. Lease Requirements.
1.
Lease Term. Lease periods are statutory. No deviations of any kind are permitted. No waivers
will be granted.
a. For Section 220 and Section 221(d), the term must be (1) for not less than 99 years which is
renewable, or (2) under a lease having a period of not less than ten years to run beyond the
maturity date of the mortgage.
b. For Section 207/223(f) and Section 231, the lease term must satisfy one of the following
requirements; (1) a lease term for not less than 99 years which is renewable, or (2) a lease
having a period of not less than 50 years to run from the date the mortgage is executed.
Note: When a lease is on trust/other land on a reservation, the HUD closing attorney must
ensure that the lease provisions are coordinated with Bureau of Indian Affairs requirements.
2.
Legal Review. The ground lease must receive both a legal and a lender underwriting review,
neither of which may be substituted for the other. HUD’s legal review shall establish that the
proposed lease is in conformity with the applicable statute, regulations, Form HUD-92070M (the
Lease Addendum model form), and applicable provisions of local law. Except as provided in
this section, any deviations from Form HUD-92070M must be approved by Headquarters’ Office
of Multifamily Housing Production and supported by a complete underwriting analysis by the
lender and reviewed by the HUD field office recommending approval. Local Counsel must
approve: (1) the legal need for any proposed lease term changes, and (2) that any term changes
are consistent with the following requirements of the Section of the Act under which the project
is underwritten. This documentation is necessary when referring requested changes to HQ.
Exceptions from the need for HQ approval are as follows:
a. The Regional Center Director may waive the right of the Secretary to purchase the fee in the
event of default only in cases where the lessor is a public entity or housing authority.
b. The Regional Center Director may approve the modification of the lease addendum only in
cases where the land and/or the land and improvements are to be leased from a public entity
or housing authority and the project is affordable as defined in Section 3.1.L.or be a low
leverage, low risk loan with significant public purpose benefit. (Market rate projects are not
eligible). In these cases, the lease addendum shall conform to the instructions set forth below:
1)
The second paragraph of the document (immediately above “LEASE
ADDENDUM”) may be stricken from the document, provided the lease is otherwise
eligible for use in the FHA multifamily mortgage insurance programs under the National
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Housing Act, i.e., it is a mortgageable real project interest under state law and conforms
to the statutory requirements for duration.
2)
The first paragraph of the document, under “INSTRUCTIONS FOR
LEASEHOLD PROJECTS”, is still applicable in this context and may not be deleted.
3)
Certain definitions in the form must be revised to accurately describe the
entirety of the project making up the leasehold estate. Namely, the definition of
“Improvements” should be stricken, along with any additional use of this word when
referencing this formerly defined term.
4)
A definition of “Project” must be included, as well as amended from the current
definition to include the land, buildings and improvements (and fixtures), so that
“Project” is defined “as the legally described land, in addition to all buildings, fixtures,
structures, alterations or other improvements and fixtures now constructed or at any time
in the future constructed or placed upon the land, including any future replacements and
additions hereafter located thereon.” This revised definition of “Project” should be
included as a footnote to the first use of the word in the first paragraph under “LEASE
ADDENDUM”.
5)
Any reference to “ground” (when immediately preceding “lease”) throughout
the document may be stricken, so that the document refers to a “lease” and not a “ground
lease.”
c. Air Rights. For projects involving air rights, local counsel may modify the addendum as
necessary to account for this form of ownership.
C. Option Price for the Federal Housing Commissioner. The ground lease must contain an option for the
Federal Housing Commissioner to buy out the lease. The option price contained in the lease
addendum must reflect the value of the leased fee in Form HUD-92264 in affect at the time of Firm
Commitment.
D. Regulation for Leaseholds. HUD regulations state “Reduced mortgage amount - leaseholds. In the
event the mortgage is secured by a leasehold estate rather than a fee simple estate, the value or
replacement cost of the project described in the mortgage shall be the value or replacement cost of the
leasehold estate (as determined by HUD) which shall in all cases be less than the value or replacement
cost of the land as project in fee simple.”
E. Unacceptable Lease Payments. Some variable lease payments may not be acceptable because they
raise the risk that future payments may be too burdensome and may cause a potential default in the
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mortgage payments. Examples of unacceptable methods of determining variable ground rents are: a
graduated schedule of future increases on a lump sum year-by-year basis, Cost of Living Allowance
(COLA) or Consumer Price Index (CPI) increases, and increases based on the results of future
appraisals or arbitration.
F. Acceptability of Lease Payments. To determine if the initial amounts are within underwriting
limitations, ground rents may be computed using any of the following three methods:
a. A fixed percentage of gross collections (or effective gross income). The percentage must remain
the same throughout the term of the lease.
b. A fixed percentage of net cash flow to equity (after debt service payments but before lease
payments). The percentage must remain the same throughout the term of the lease.
c. A stated dollar amount per year which must remain fixed for at least ten years more than the term of
the insured mortgage. (If monthly or quarterly payments are required, these will be converted to
annual amounts by the appraiser). When the lease contains more than one method of computing
lease payments, it must also indicate whether the amount to be paid is to be the greatest or the
least, or the sum of these amounts. The stated annual dollar amount may be described as a
minimum payment.
d. The MAP appraiser must estimate the lease payments, using the lump sum annual amounts and
percentages contained in the lease provisions, as applied to the estimated annual effective gross
income or annual cash flow indicated by the appraisal and on Form HUD-92264. (The estimates
are not based on the income which would be available during any period of deficit operation, but
must reflect the effective gross income shown on Form HUD-92264 and the corresponding cash
flow to equity which result when sustaining occupancy has been reached.).
G. Valuation Instructions.
1.
For projects that involve a ground lease without an option to buy, the Department will not
insure a loan that will recognize a leasehold interest for security unless the property meets the
requirements of paragraph 3 below. For this reason, the value of the site “as is” will be entered
by the MAP Underwriter on lines 3.b.(1) and 4.f on the form HUD 92264-A named “Value of
the Leased Fee”. This is to be done regardless of whether the ground rent is an escalating
amount based on a percentage of gross collections or cash flow, or whether it is a level stated
dollar amount each year.
NOTE: These instructions are included only for underwriting and loan sizing purposes. The
actual value of the leased fee is estimated by capitalization of the ground rent in section K-6 on
the form HUD 92264.
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Leaseholds/Ground Leases
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For projects involving a ground lease with an option to buy, the value of the leased fee may be
estimated by capitalizing the ground rent. The following conditions apply:
a. The lease must give the lessee an option to buy the site in fee simple for a stated purchase
price at some time during the term of the lease.
b. This stated purchase price must be provided in the ground lease and may not exceed the value
of the fee estimated by the capitalization method of value at the time of project appraisal.
c. The annual ground rent required by the lease must be level payments of a stated dollar
amount and must remain unchanged from the date of mortgage endorsement to at least ten
years after the mortgage term.
3.
For affordable projects involving a lease on both land and improvements with an option to
buy. In addition to G.2 (above), the following requirements apply:
a. The lessor must be a non-profit entity.
b. The project must meet the affordability requirements set forth in 7.15.G.4.b.below, as well as
the underwriting requirements set forth in 7.15.g.4.c-g, below.
c. No deviations from form HUD-92070M are permitted, except for those previously stated in
B.2.b (above).
4.
For affordable projects involving a lease on land, or on both land and improvements:
a. The lessor must be a governmental body or housing authority. There are no exceptions and
no waivers at the Regional Center level.
b. The project must:
1. Qualify as affordable housing, as defined in Section 3.1.L; or
2. Be a low leverage, low risk loan with significant public purpose benefit.
c. The project interests to be appraised are “fee simple” and “leased fee.”
d. There must be a thorough discussion in the appraisal and underwriting narrative regarding
the lease terms and a determination that the leasehold estate is marketable.
e. The fee simple determination must be made based in compliance with the current MAP
Guide
f. The Department will permit the use of Discounted Cash Flow analysis and/or Direct
Capitalization of the or in determining the value of the leased fee. There must be a thorough
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discussion of the parameters used and how the discount rate was derived.
g. The value of the leasehold will be accounted for on the form
h. HUD 92264A by subtracting the value of the leased fee as appropriate in Criteria 3, and 4.
5.
Ground Leased from Public Bodies. On sites leased by a governmental body to a developer
for use for a specific purpose, the procedures outlined in this chapter remain unchanged, except
that the "As Is" market value of the site, vacant or improved, in fee simple may not exceed the
value of the leased fee.
6.
Rehabilitation of an Existing Leasehold Project (Leasehold Improvements owned by the
mortgagor). When a leasehold estate contains existing buildings and is to receive an insured
mortgage for substantial rehabilitation, valuation processing will vary from fee simple
rehabilitation processing as follows:
a. Tentative "As Is" value of both land and building(s) must be established by capitalization of
income and by comparable sales. The Cost Approach may be used where buildings are in
extremely poor condition and/or vacant.
b. Value of the land without building improvements must be made by market comparison based
on sales of similar sites.
c. Acquisition Cost of Buildings. Since the value of the land without improvements does not
include buildings, the cost of the acquisition of the buildings will be whatever added cash
amount the buyer pays the seller of the subject project for the buildings, net of land, at or
before initial closing. A certificate of the separately agreed amount for purchase of the
buildings must be submitted with the application exhibits. In a refinancing loan which does
not involve a buyer and seller, the cost of the buildings may not exceed the remaining
mortgage balance.
d. Final “As Is” value of entire project is the lesser of Tentative “As Is” Value or the sum of
Value of Land without Building Improvements and Acquisition Cost of Buildings. Value of
the Leased Fee is considered to be the Value of Land without Building Improvements. The
value of the leased fee must be estimated to equal the value of the site in fee without the onsite improvements and is entered on Line K-6 of Form HUD-92264.
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Tax Abatement Procedures
Document page 223
H. Other Provisions:
1. Ground Rent during Construction. For proposed construction under all FHA insurance
programs, lease payments during construction must be included in the estimated replacement cost
of the project and in the certified cost, subject to the following conditions:
a. The period for which ground rent is estimated must be the same as that for which interest and
other related charges are calculated, or, the estimated construction time plus two months.
b. Ground rent during construction must be entered in Line G 69 of Form HUD-92264 (currently
labeled “Construction Fee.”). A remark must be entered in Section H, indicating that the
amount in Line G 69 represents Ground Rent during Construction.
c. Ground rent must not be included in the base on which Section 220, 221(d) BSPRA is
calculated.
d. The annual amount of ground rent during construction may not exceed the test for acceptability
of lease payments.
e. For rehabilitation under all Sections of the Act, ground rent during rehabilitation must be
included in the replacement cost.
7.16
Tax Abatement Procedures
A. General Comments and Exceptions. Tax Abatement is a reduction of project taxes for a specified term
by the taxing authority. Properties with abatement are eligible for additional mortgage funds under
certain circumstances. The abatement must run with the real estate and not with the type of
sponsorship if it is to secure additional mortgage proceeds based upon value (Criterion 3). The debt
service approach (Criterion 5) used for underwriting must include an amount for the expected project
taxes (including abatement or PILOT) in project operating expenses. The terms of the tax abatement
must be analyzed and a stress test demonstrating the risk must be performed even if the present owner
or its transferee may benefit from the abatement for the term of the mortgage. The risk that a
transferee of the project or an assignee of the mortgage in the future might cause the tax abatement to
be lost is an unacceptable risk to the insurance fund. Exceptions to these requirements include the
following:
1. If the financing includes LIHTC equity and if the tax abatement runs with the sponsorship
(borrower) entity, then the Regional Center Director may waive the MAP Guide so that the
underwriting does not have to include a provision for project taxes during the period of the tax
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abatement. This exception is justified for low loan-to-value mortgages on LIHTC projects and the
additional due diligence and oversight by private equity investors.
2. Properties leased from a governmental body to either a non-profit or for-profit developer, where
the project is exempt from taxes and the abatement flows to the leasehold improvements. There is
usually a requirement for a percentage of units to be set aside as affordable housing which is
imposed by a land use restriction or regulatory agreement. Regional Center Directors may grant a
waiver, after appropriate review, to promote affordable housing.
B. Long Term Tax Abatement. If the amount of the tax abatement is fixed and runs the entire term of the
mortgage, the real estate tax expense reported on the HUD-92264 must be the actual amount of taxes
the project will pay, if any. The full amount of the real estate taxes without the abatement must be
noted in the remarks section of the HUD-92264. The project will benefit from an increased mortgage
amount due to the lower pro-forma operating expenses and an increased NOI estimate. When the
abatement runs for the full term of the mortgage, the NOI used for Form HUD-92264-A Criteria 5
may also be processed at the reduced tax amount. Also, if value attributable to long term tax
abatement is recognized in the subject’s market area, the same NOI may be capitalized and the
resulting value may be used in Criterion 3.
C. Short Term or Variable Tax Abatement. If the abatement is short term or variable, it may still be used
to secure additional mortgage proceeds. The additional mortgage will be the amount that will
amortize over the term of the tax abatement. A special amortization plan must be requested which has
debt service payments that are increased by the additional net income generated during the term of the
abatement. When processing a short term or variable abatement, the full amount of the project taxes
must be estimated and included in the total project expenses on Form HUD-92264 as if there were no
abatement. The additional debt service carry resulting from the abatement must be calculated on line
I, Criteria 5 of HUD-92264-A.
If Criteria 5, “Amount Based on Debt Service Ratio” is not the controlling criterion, short term or
variable abatements cannot be used to secure additional mortgage proceeds. Also, the appraiser must
not include extra value associated with short-term abatement in either the estimate of land value, the
“As Is” value for substantial rehabilitation or the “As Repaired” value for existing projects, and it may
not be included in Criterion 3.
1. Short Term Abatements: Assume that Project A has been awarded a 5-year tax abatement of
$5,000/year and the interest rate on the insured loan is quoted at 7.5% and the MIP is 0.5%. The
amount of additional mortgage is calculated by dividing the annual abatement, $5,000 by the
applicable debt service constant (P, I, and MIP). In this example the debt service constant is
0.245455383.
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$5,000 / .245455383 = $20,370
Additional mortgage amount. The mortgage amount based upon debt service (Criteria 5 of HUD92264-A) would be increased by $20,370 and a special amortization schedule would be required
with a debt service payment that is $5,000/year greater in years 1 through 5.
2. Variable Abatements: Variable tax abatements are more complex to quantify, but are essentially
calculated in the same manner. Assume that Project B has been awarded 15-year tax abatement.
In years 1 through 5, the abatement is $25,000; in years 6 through 10 the abatement is $10,000;
and in years 11 through 15 the abated amount is $5,000. The interest rate on the insured loan is
quoted at 7.5% and the MIP is .5%. The amount of additional mortgage is calculated as the
amount that could be fully amortized by the variable payments over the 15-year period based on
the stated financing terms. The graph below illustrates the calculation.
$25,000
($5,000)
$20,000
($5,000)
$15,000
($5,000)
$10,000
($5,000)
($5,000)
$5,000
($5,000)
($5,000)
Abatement Period 1
$25,000 -$10,000 = $15,000
$15,000 / 0.245455 = $61,111
Abatement Period 2
$10,000 - $5,000 = $5,000
$5,000 / 0.147422 = $33,912
($5,000)
Abatement Period 3
$5,000 - $0 = $5,000
$5,000 / 0.116241 = $43,014
When there are two or more abatement amounts and periods, and the amounts decline, the
abatement amount for each period is found by subtracting the abatement amount of the next
period. Period 1 will run for 5 years, Period 2 will run for 10 years, and Period 3 will run for 15
years. Because all three periods begin amortization at the same point in year 0, the amount of the
abatement for the next period must be subtracted to avoid double counting.
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Project Based Section 8 and LIHTC Processing
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Abatement Period 1
$25,000 minus $10,000 (the amount of abatement in period 2) = $15,000 for 5 years. The
debt service constant for a 5 year term at 7.5% interest with 5% MIP is 0.245455383.
Dividing $15,000 by 0.245455383 indicates additional mortgage proceeds of $61,111
attributable to period 1.
2)
Abatement Period 2
$10,000 minus $5,000 (the amount of abatement in period 3) = $5,000 for 10 years. The debt
service constant for a 10 year term at 7.5% interest with 0.5% MIP is 0.147442123. Dividing
$5,000 by 0.147442123 indicates additional mortgage proceeds of $33,912 attributable to
period 2.
3)
Abatement Period 3
$5,000 minus $0 (since there are no periods remaining) = $5,000 for 15 years. The debt
service constant for a 15 year term at 7.5% interest with 0.5% MIP is 0.116241483. Dividing
$5,000 by 0.116241483 indicates additional mortgage proceeds of $43,014 attributable to
period 3.
4)
Adding the supportable mortgages from each of the abatement periods results in a total
additional supportable mortgage of:
Period 1 = $ 61,111
Period 2 = $ 33,912
Period 3 = $ 43,014
Total = $138,037
The mortgage amount based on debt service, (Criteria 5 of HUD 92264-A) would be increased by
$138,037 and a special amortization schedule would be required with a debt service payment that
reflects $25,000 per year in years 1 through 5, $10,000 per year in years 6 through10, and $5,000
per year in years 11 through 15.
7.17
Project Based Section 8 and LIHTC Processing
A. For Section 223(f). The project must be evaluated under two scenarios: a) the “hypothetical market
value” of the project without regard to any Section 8 project based subsidies, rent restrictions or
LITHC; and b) a debt service analysis that considers all Section 8 project based subsidies and other
low income rent restrictions must be performed. Two independent Section C rent schedules must be
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prepared, one for a hypothetical market rent estimate and one that recognizes all rent restrictions and
subsidies.
1. Criteria 3 Market Value: The appraiser must ignore the Section 8 contract rents, tax exempt bond
or LIHTC restricted rents when determining market value and the income to be capitalized for a
determination of market value for the purposes of determining Section K, Form HUD-92264, and
Criteria 3 Form HUD-92264-A Value. To be consistent, the appraiser must use a market
capitalization rate and must assume market rents in the income approach to value. Note that the
comparable sales approach to value must be completed without regard to Section 8 or LIHTC
awards.
2. Criteria 5 Debt Service Analysis: In calculating net operating income to be used for Criteria 5
Debt Service, rent restrictions must be observed. For the Criteria 5 debt service analysis, the Line
6, Form HUD-92264-T rents must be used. This applies to projects receiving LIHTCs that may
use either tax exempt bond or market-rate financing.
3. Form HUD-92264T for LIHTC projects without Section 8: Follow existing form instructions.
Processing will be based upon the lesser of Lines 1, 4 or 5.
4. Form HUD-92264T for Section 8 Project Based Assistance without LIHTC:
a. Enter the market rent by comparison on Line 1
b. Enter Personal Benefit Expenses on Line 2
c. Line 3 is Not Applicable
d. Line 4 is Not Applicable
e. Enter the Project Based Section 8 Contract Rent on Line 5
f. Subtract Line 2 from Line 5 (if applicable)
g. Process using the lesser of Line 1 or Line 5
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5. Form HUD-92264T for Section 8 Project Based Assistance with LIHTC:
The LIHTC rent must be recorded but is not used as a limiting criterion because the total income
to the project is the LIHTC rent combined with the Section 8 rent, so that the actual amount of
rental income to the project will be the Project Based Section 8 rent, as follows:
2 Bedroom Section 8 Contract Rent
2 Bedroom LIHTC Rent limit
$850/Month
$350/Month
Resident’s Rent Obligation to Project:
Section 8 Payment to Project:
Total Income to Project
$350/Month
$500/Month
$850/Month
B. Fee Income. If additional fees for project amenities are mandatory for all residents, the mandatory fee
income from restricted units must be excluded from the calculation of net income. The mandatory fee
income from non-restricted units may be included if these amenity fees are indicated by comparable
properties in the market and it must be explained in the remarks section of Form HUD-92264.
C. Expenses/Fees. Properties with LIHTC restricted units will commonly have a higher operating
expense ratio per unit than market rate properties, which may be due to increased administrative costs
for tax credit compliance monitoring, performing resident income certifications and staffing to provide
on-site resident services. Estimating operating expenses for projects that are to be funded through the
sale of LIHTC, requires the analysis of LIHTC comparables if available, and consultation with other
experts (i.e. appraisers and project managers) in the context of current market conditions which should
consider the size of the project and unit mix. Utility expense unit rent adjustments in LIHTC projects
may be estimated by the analysis of actual costs supplied by the developer, the utility company or by
use of the Section 8 utility allowances.
1. If the project has the same operating expenses under LIHTC or Project Based Section 8 operation
as it would under market rate operation, enter expenses as usual.
2. If a project has different expense needs as a subsidized project, the expenses used for Criteria 3
must be market rate expenses and the expenses used for Criteria 5 debt service shall be the actual
expenses under its’ proposed usage. This will insure that the Criteria 5 - debt service analysis of
the HUD 92264a is calculated based on the actual estimate of the rent restricted NOI for the
project.
3. Audit Fee no Longer Recognized. With the elimination of the requirement for an audited cost
certification for mortgage insurance transactions with LIHTC, assuming the ratio of loan proceeds
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to the actual cost of the project is less than 80 percent, the audit fee will no longer be recognized as
an allowable cost in the Total Estimated Replacement Cost of Project, Section G line 66 Form
HUD-92264.
4. A real estate tax abatement will be recognized in both value (Criterion 3) and underwriting
(Criterion 5) calculations even if the abatement runs with the owner rather than with the land, so
long as the owner in non-profit sponsored.
D. Sections 220 and 221(d) Site Value and “As Is” Value.
The site value of land in new construction or the “As Is” value in substantial rehabilitation cases is to
be estimated using a capitalization rate and project NOI as if the units and the project were unrestricted
and market rate, without considering: a) any additional value that may be attributable to subsidies
available to the project or any LIHTCs or other tax benefits the project will receive, or b) any value
reduction due to any NOI or value limitations caused by regulatory agreements or affordability
restrictions imposed by any subsidy program or tax regulation. This valuation methodology permits
sponsors to acquire project at its market value for new construction or rehabilitation of affordable
housing. The value attributable to the presence of LIHTCs diminishes over time and is not always
freely transferable, and thus should not be taken into consideration.
NOTE: Cost Certification instructions (enforced by Statute) dictate that the lesser of the “as is” value
of the land and improvements (before repair or rehabilitation) or the purchase price of the land and
improvements, is used in the cost build up for Criterion 3 of form HUD 92264A, in substantial
rehabilitation cases. Consequently when mortgage proceeds will be used to fund the acquisition of the
project, the “as is” value estimation will be used as a test of the reasonableness of the acquisition price.
When the acquisition price is less than the “as is” value of the land and improvements (as accepted by
HUD), and mortgage proceeds will be used to fund the acquisition of the project, the acquisition price
will be used in the cost build up for Criterion 3 forming the cost basis for the Firm Commitment
When the acquisition price exceeds the “as is” value of the land and improvements (as accepted by
HUD), then the acquisition price must be reduced to the “as is” value and will, subsequently, comprise
the basis of the cost build up for the Firm Commitment.
When mortgage proceeds will not be used to fund the acquisition of the project, the “as is” market
value of the project will be used in the cost build up for Criterion 3 forming the cost basis for the Firm
Commitment. This is particularly significant when below market rent restrictions, (such as in the case
of LIHTC limited rents or Section 8 rent subsidy) are in place and the use of market rents in valuing
the project will result in a premium over these rent restrictions. Income Limits. The HERA must
ascertain that the correct income limits are employed in calculating the maximum LIHTC rents and in
completing Form HUD-92264-T. HERA modified HUD’s income limit methodology for calendar
years after 2008 to require HUD to increase applicable area median incomes by the amount area
median incomes rise, even if the HUD- determined area median incomes would be frozen under
HUD’s 2007 and 2008 income limit methodology.
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Appraisal Review Policy and Requirements
A. Scope of Work.
1.
Scope of Work includes project identification, extent of inspection, the type and extent of data
researched and the kind of analysis needed to arrive at opinions or conclusions. The rule also
states that appraisers have broad flexibility and significant responsibility in determining the
appropriate scope of work for an appraisal or appraisal review assignment.
2.
According to USPAP, appraisers, including HRAs are responsible for determining the scope of
work. However as an employer who is also the client, the Department may issue guidance as to
what is the extent of an assignment for a review appraisal. It is not a violation of USPAP for an
appraiser to accept an assignment, in which a limited scope of work is appropriate, so long as the
assignment and scope of work are clearly defined, produces credible results and is performed
objectively without bias.
3.
HRAs may have to expand the scope of work and do additional research in performing an
assignment. The HRA should discuss such situations with management in order to determine
whether additional work by HUD staff is appropriate, or if the application should be rejected or
approved with conditions.
4.
According to USPAP, if relevant information is not available because of assignment conditions
that limit research opportunities (such as conditions that place limitations on inspection or
information gathering), an appraiser must withdraw from the assignment unless the appraiser can
still develop credible assignment results. For example, they may be able to modify the
assignment conditions to expand the scope of work to include gathering the information, or use
an extraordinary assumption.
B. Jurisdictional Exception Rule.
1.
The Jurisdictional Exception Rule provides a saving or severability clause intended to preserve
the balance of USPAP if compliance with one or more of its parts is precluded by the law or
regulation of a jurisdiction. When an appraiser properly follows this Rule in disregarding a part
of USPAP, there is no violation of USPAP.
2.
USPAP defines law as including constitutions, legislative and court-made law, administrative
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rules and ordinances. Regulations include rules or orders having legal force, issued by an
administrative agency, such as HUD. This would include Handbooks, Notices, and the MAP
Guide. Instructions from an attorney or a client do not establish a jurisdictional exception.
3.
The need to take a Jurisdictional Exception should be rare. If it is needed, the appraiser or HRA
must specifically cite the regulation and the portion of USPAP that is affected. Verbal direction
from management is not sufficient to justify an exception. The HRA must cite a citation from the
MAP Guide or other appropriate authority.
C. Record Keeping Rule. This rule specifies record keeping procedures for appraisers. The rule does not
mandate that an appraiser have possession of assignment work-files. The Department does not permit
permanent or personal possession of records relating to a review appraiser's work. The Department
retains these records for far more than the time required under USPAP and will, with due process of
law, cooperate with appraiser regulatory agencies, professional peer review committees, and to assist
obtaining a professional designation. Appraiser work-files will be maintained in the Satellite office.
When an HRA leaves employment they shall be transferred to the Regional Office. Records should be
stored on the local or regional network drive. Paper records should be scanned as needed.
D. Loan Committee. HRAs are expected to complete workload assignments to facilitate loan approval
(or rejection) including an executive summary and other material needed for Regional Center or
National Loan Committees. The summary is intended to allow peers and management the ability to
efficiently complete their reviews and conclusions. The Department allows the use of an alternative
format for the NLC narrative as long as it is approved by the Regional Center Director and contains an
executive summary. It is the Department’s position that its programs and instructions are in
compliance with USPAP. Management has the right to disagree with conclusions made by HRAs or
any other technicians. Management should document the file with the reasons for any disagreement.
The original conclusions are part of the permanent project file.
E. Workload Sharing. Workload Sharing arrangements may require HRAs to perform reviews without
the benefit of being able to do a physical inspection. The assignment will generally be completed with
the HRA making certain assumptions, such as the condition to be consistent with the photographs and
other reports.
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F. Consultations with other staff. HRAs may be required to provide consultation with senior
underwriters and other staff who have been asked to review an appraisal. A Frequently Asked
Questions grid included in Addendum 7 that discusses tasks which can be accomplished, as well as the
level of required USPAP compliance.
G. Environmental Processing. The responsibility for environmental processing has been typically
assigned to the HRA, though other appropriately trained HUD staff may also perform these reviews.
Federal regulations (24 CFR 50.11 and 50.32) require that a HUD approving official make an
independent evaluation of the environmental issues, take responsibility for the scope and content of the
compliance finding, EA or EIS, and make the environmental finding. This function cannot be
delegated to a lender or the lender’s or owner’s consultants. The HRA staff appraiser or other
environmental reviewer can and should be provided with information from the lender or the lender’s
consultant, however, the function must be performed by HUD staff.
When HUD staff appraisers are assigned this duty, it is not considered an appraisal assignment subject
to USPAP requirements. The Department expects the appraiser or other responsible staff to ensure
compliance with Wetlands/Flood Plain Executive Orders, Fish and Wildlife, Historic Preservation,
etc., and to obtain such information as needed from other governmental or private sources, based on
review of the lender prepared Phase I Report and preparation of any required documentation. It should
be noted that the Department has consulted with the Appraisal Foundation and has concluded that the
obtaining of such information by the HRA is not advocating for the client and USPAP does not apply.
H. Technical Appraisal Review Requirements. The HRA or senior underwriter must follow the review
requirements listed below:
1.
Exhibits. The lender must submit the exhibits listed in Section 7.10.A to HUD.
2.
Market Study Review. The HRA or senior underwriter and the EMAD economist must each
provide a desk review of the market study to determine reasonableness and compliance with
Market Study requirements. The Reviewer must make final recommendations to the team leader
regarding market demand for the project.
3.
Level of Inspection. The HRA or senior underwriter must state the level of inspection.
Preferably they should inspect the subject site and as many as possible of the comparables used
in the appraiser’s forms HUD-92273 and HUD-92274 analysis.
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4.
Environmental Review. The HRA (or other designated employees) must review the Phase I
ESA, and prepare any required documentation.
5.
The HRA must review site characteristics and make a recommendation regarding site
acceptability to the team leader.
6.
The HRA must determine that the comparables submitted are acceptable.
7.
From a review of Forms HUD-92264, HUD-92273, HUD-92274, and supporting information,
the HRA must make a recommendation to the team leader regarding:
a. The acceptability of the proposed rents and estimated rental income.
b. The acceptability of the total operating expenses.
c. The acceptability of the site and the estimated warranted price of land or “as is” value.
d. If applicable, the estimate of market value.
e. Any recommended modifications necessary to approve the application instead of a
categorical rejection. Any value conclusions made by HRA that differ from the appraisal
under review require preparation of a work file in accordance with Standard 1 of USPAP.
Only licensed appraisers may develop a different value. In determining acceptability, the
Department prefers that the HRA or senior underwriter only opine on the quality of the work
under review and as to whether or not it is reliable for use in underwriting mortgage
insurance.
8.
I.
Compliance with USPAP. The HRA or senior underwriter must also ascertain if the appraisal
complies with Standards 1 and 2 of the Current USPAP. Senior underwriters must be familiar
with USPAP or consult as necessary with the HRA. USPAP does not require that reviews to
determine USPAP compliance be made by an appraiser.
Documentation of the Appraisal Review. The Department’s SharePoint site contains a number of
appraisal review templates as well as review forms from the previous MAP Guide. HRAs and senior
underwriters have a great deal of flexibility in the format that they use, so long as it is approved by the
Regional Center Director and contains an executive summary.
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Introduction
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Chapter 8
Mortgage Credit
8.1
Introduction
Principals of the borrowing entity and entities participating in FHA multifamily mortgage insurance
programs must have a positive credit history demonstrating that they will honor their legal, financial and
contractual obligations. All Principals must be identified and analyzed with respect to their capacity of
credit, experience and financial histories. Regulatory standards established in the Code of Federal
Regulations (24 C.F.R.) Part 200 Subpart H Participation and Compliance Requirements determine the
appropriate review of previous participation in multifamily insured programs based upon their past
performance as well as other aspects of their records. This chapter is designed to explain who to review
and explain FHA’s underwriting criteria for determining creditworthiness (positive credit history,
adequate financial strength) of Principals and determining the maximum insurable mortgage and financial
requirements for closing.
In many areas addressed in this chapter, separate policy has been developed for Low Income Housing Tax
Credit projects and this policy is presented in Chapter 14. If apparent conflicts arise in areas addressed by
both this Chapter and Chapter 14, Chapter 14 guidance should prevail in the underwriting of Tax Credit
Projects.
8.2 Borrower Types – Single Asset Borrower Entity
A single asset borrower entity is required for all multifamily FHA mortgage insurance projects. Natural
Persons, Delaware Statutory Trusts, foreign entities, and Tenants in Common are not eligible, although
such entities may have ownership interests in the single asset entity borrower. Acceptable forms of single
asset entities that may participate in FHA insured transactions include the following:
1. General Partnership (GP) with two or more general partners.
2. Limited Partnership (LP) with one or more general partners and one or more limited partners.
3. Corporation, C Corporation, or S Corporation with shareholder owners and corporate officers and
directors who may or may not be shareholders.
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4. Limited Liability Company (LLC) composed of members, with one or more managing members and
one or more investor members.
5. Trust with beneficiaries and one or more trustees (when borrower is a trust the duration of the trust
must be equal to or longer than the term on the FHA Note).
6. Nonprofit Corporation with officers and directors.
7. Any other public or private single asset borrower entity.
8. Any combination of acceptable ownership forms can be used to establish a joint venture for the
purpose of jointly sharing the risks and the rewards by contributing the appropriate knowledge, skills
or assets necessary to a successful development project. However, the borrower must always be a
single asset mortgagor entity.
Generally, foreign nationals and corporate entities may participate as Principals. However, the single asset
borrower entity must be registered in the United States and in the State where its corporate office is
located. At least one principal with operational decision-making authority must be a United States citizen
or a foreign national lawfully residing in the United States, having an immigration status granted by the
United States government that would enable that person to exercise such authority.
EB-5 is a U.S. Citizenship and Immigration Services (USCIS) program that has been used to raise equity.
For information on the EB-5 program please visit the U.S. Citizenship and Immigration Services (USCIS)
website at http://www.uscis.gov/eb-5. EB-5 investments must comply with HUD requirements for funding
equity, and thus cannot use a deferred pay-in schedule (such as may be used for tax credit equity
proceeds.)
Structures that propose EB-5 investments as debt rather than equity are subject to the limitations on
secondary financing, and only allow it within the limits specified. HUD will only consider waivers if
there are significant affordable rent and income restrictions and there is some public interest motivation
(beyond the EB-5 program incentive itself.)
A U.S. based developer and managing member of the project’s ownership entity, must meet HUD
requirements for a domestic principal/manager.
8.3
Reviewing Principals and Other Parties in Control
The individuals and entities who exercise operational and financial control over a project are subject to
review. This review includes underwriting review, and a review of previous participation of such
individuals and entities in federal programs.
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A. Determining Principals and Who is in Control.
The term Principal in this MAP Guide refers to individuals and entities that exercise operational and
financial control over a project. MAP Underwriters consider Principals in three contexts: (1)
individuals or entities which must be disclosed for Previous Participation review; (2) persons or
entities required to execute Section 50 of the HUD Regulatory Agreement; and (3) individuals or
entities which possess financial and/or legal control of the borrower, thereby requiring full or limited
financial and credit analyses.
“Principals” are defined as:
1. “Active Principals" are individuals or entities who singly or with others, direct and control the
Borrower and are responsible for the Borrower’s ability to execute any and all actions for the
benefit of the project, regardless of the extent of their equity interest.
2. "Passive Principals" are persons or entities who singly or with others have limited or no decisionmaking power or control over the Borrower but who have an ownership interest of 25% or more
(10% for corporations) in the Borrower.
3. "Borrower" is the single asset entity mortgagor.
A Principal may be a public or private entity, an individual or business entity proposing to participate
in a project as an owner or general contractor. A Principal maintains significant decision-making
authority regarding an FHA-insured loan transaction, and/or retains a significant percentage of
ownership in a single asset borrower entity. The Principal’s role can involve active participation in
directing the activities and affairs of the borrower entity or passive participation when an ownership
interest has been acquired in the entity. All types of Principals are subject to financial and credit
disclosure and underwriting.
B. Underwriting Principals and Those with Control of a Project.
1. Principals must have positive experience and qualifications in developing, owning or building
multifamily properties reasonably comparable in kind and scale to the subject of the proposed
transaction. Comparable in kind and scale means: (a) similar in physical size (e.g. number of
units) and building type and uses (e.g., low rise, high rise, commercial spaces); (b) similar
financially (e.g. revenues, expenses, size of mortgage, required liquidity); (c) similar operationally
(e.g. target markets/tenant population, elderly, subsidized or affordable); and (d) similar in kind of
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transaction purpose (e.g. acquisition, re-positioning/turn-around, rehabilitation, new construction).
Underwriting a Principal requires their financial and credit disclosure, including: (1) a designated
person to sign Section 50 of the Regulatory Agreement, (2) individual or entity credit reports, (3)
individual or entity financial statements, HUD forms, documents and Schedule of Real Estate
Owned (REO)/debt schedules, (4) Internet searches and searches of debarment, OFAC (Office of
Foreign Assets Control) and any other relevant databases, and (5) pre-approval in cases where
their total HUD-insured debt is greater than $250,000,000.
Active principals of a borrowing entity with less than a 25% ownership interest (10% for
corporations) but possessing a substantial financial interest and/or having decision making
authority are subject to underwriting review.
2. Other Principals (individuals and entities) must be reviewed for underwriting purposes:
a. Investors that have exceeded the $250,000,000 million threshold or wish to avoid exceeding
that threshold and wish to invest in a project as a passive investor with less than a 25% interest
(10% for corporations).
b. An investor qualifying as a key financial partner from both a financial strength standpoint and
cash requirement contribution but still maintains an ownership interest of less than 25% (10%
for corporations).
3. Principals not subject to credit review:
a. Investor entities with limited liability benefiting from tax credits, including but not limited to
low-income housing tax credits pursuant to Section 42 of Title 26 of the United States Code,
whether such investors are syndicators, direct investors or investors in such syndicators and/or
investors.
b. Parties whose sole interest is that of a purchaser or owner of less than five individual unit(s) in
the same condominium or cooperative development; (ii) parties whose sole interest is that of a
tenant in not more than two units in an FHA mortgaged insured property.
c. Public Housing Agencies (PHAs) where the PHA is acting in its capacity as a PHA owning
and/or operating public housing. However, PHAs are expected to form single asset entities to
hold properties financed with FHA mortgage insurance.
d. Passive Principals who have limited or no decision making power or control over the
ownership entity. A passive Principal’s financial or other obligations to the borrower and the
property may be fixed and defined before endorsement, with the borrower or its Principals
having limited or no power to compel a passive Principal to increase its obligations. A passive
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Principal may have limited power singly or with others, or no power to remove, replace or
diminish the powers, or alter the compensation of Principals. As used here “limited” means
that the rights of a passive Principal to exert control or effect decisions that are defined in
organizational documents and are limited to specific actions intended to remedy negligence or
default by a Principal, or to protect the passive Principal from loss due to a default or failure of
performance by the borrower.
C. Regulatory and Processing Requirements for Previous Participation Review.
Certain Principals are subject to a previous participation review as set forth in 24 C.F.R. Part 200, as
the same may be amended from time to time. This review is in addition to any underwriting
considerations or review. Those individuals and entities subject to previous participation review in
accordance with 24 C.F.R. Part 200 must submit form HUD-2530 or any succession form or
electrically through the Active Partners Performance System (APPS) or any successor electronic
system. Individuals and entities that are excluded from underwriting review are also excluded from
previous participation review. Guidance with respect to previous participation review may be updated
from time to time through Mortgagee Letters or other appropriate guidance means.
1. For any multifamily project financed or proposed to be financed with an FHA insured mortgage
under the National Housing Act, an individual or entity serving in any of the following capacities
is also considered to be a ”Participant” for purposes of this chapter. Participants are persons or
entities who may or may not be an Active or Passive Principal but who are required to file for
previous participation review, e.g. Form HUD-2530 or APPS:
a. A borrower;
b. An owner, if different than borrower, e.g. in a transfer of physical
assets (TPA) or change in role;
c. A management agent; and/or
d. A general contractor.
In addition to the entities named above, an individual or entity determined by HUD to have control
over the financial or operational decisions of an FHA-insured property shall also make a Previous
Participation Review Submission.
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The previous participation certification procedure assesses the experience of applicants with FHAHUD insured mortgage programs and with the United States Department of Agriculture Rural
Development (USDA-RD) multifamily programs. All submissions must include a Previous
Participation Certification and may be made via the Active Partners Performance System (APPS),
or a paper Form HUD-2530 . They are responsible for its timely filing with the local HUD office
with jurisdiction over the project application or proposal. Previous Participation Review or Form
HUD-2530 is not a substitute for processing the application for project acceptability, credit
capacity, or competency. Paper submissions are acceptable if the Participants are having trouble
with the APPS access. All Participants must certify and sign the certificate personally as to their
individual record and are responsible for its timely filing with the Regional Center having
jurisdiction over the project. Any Participant experiencing trouble with or want to learn more
about APPS, get registered, access the user guide and use the tutorial should visit HUD’s website
at: http://www.hud.gov/offices/hsg/mfh/apps/appsmfhm.cfm.
2. Certifications are required from the following:
a. Tax credit syndicators or investors with an identity of interest in the general partner.
b. For-profit entities; officers of the entity’s board of directors (BOD); officers and the executive
management team of the entity (such as the President, Chief Executive Officer etc.), if
different that the officers of the BOD; or any other individuals determined by HUD to control
the entity.
c. Nonprofit borrowing entities and its officers and executive management team (if different).
d. A previous participation certification (through either a form HUD-2530 or APPS) is not
required on the following situations or roles:
1) Individuals who provide a certification in one capacity need not provide a separate
duplicate certification;
When a corporation (for-profit or nonprofit) is a Principal, all its officers, directors and
principal stockholders need not individually sign, certify nor file the certificate when they
all have the same record. When their previous participation records are identical the officer
authorized to sign for the corporation will list on the certificate the full names for all such
principals connected with the corporation who do not elect to sign. Those principals who
have a separate participation record outside that of their corporation must certify, sign and
file. The objective is full disclosure.
2) Attorneys and architects with only an arms-length fee arrangement for services;
3) Sub-contractors;
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4) Minor corporate officers who do not exercise control over an entity or who have no
significant involvement in a project, as determined by HUD, need not complete a previous
participation submission ;
5) Persons or entities with passive ownership interests greater than 25% (10% if a
corporation) and officers and directors of corporations which are passive principals (e.g.
pass-through/ shell company);
6) Parties whose sole interest is that of purchaser or owner of less than five individual unit(s)
in the same condominium or cooperative development; and parties whose sole interest is
that of a resident;
7) Passive Tax Credit investor partners are exempt in accordance with Section 2(2) of the
Preservation Approval Process Improvement Act of 2007. (This document does not pertain
to Historic or New Market Tax Credits, described in Chapter 14 Tax Credit). However they
are required to submit the Identification and Certification of Eligible Limited Liability
Investor Entities, or Passive Investor Certification (See Chapter 14.10);
8) Tax credit syndicators, investor members of LLCs, investor partners of limited partnerships
or any other passive partners, even in the case of an identity-of-interest. However they are
required to submit the Identification and Certification of Eligible Limited Liability Investor
Entities or Passive Investor Certification;
http://portal.hud.gov/hudportal/documents/huddoc?id=Passive_Invest_Id_Certifi.pdf.
9) Public Housing Agencies/Authorities, who are subject to separate treatment for projects
redeveloped under the RAD program; and
10) Brokers whose services are limited to referring the loan to a lender and presenting
information on behalf of the borrower.
D. Nonprofit Principals.
Nonprofit Principal is understood to mean “the borrowing entity and its Board of Directors” (BODs).
The BODs are treated as individuals acting in the role of an officer and/or a member/director.
“Sponsor” is an informal term use for persons or entities who may do one or more of the following:
locate and control the site; assemble the development team, provide financial assistance to the
project or provide development experience and expertise to the project in ways other than as a paid
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consultant. The Sponsor is not the Single Asset Mortgagor Entity though they may also act as a
Principal in the ownership entity.
1. Nonprofit entities and sponsoring parent organizations that are Principals must demonstrate
financial strength, credit history, experience and capacity. Executive officers and any
development consultants must provide resumes evidencing experience commensurate with the
requirements of the project. Generally, analysis of personal financial information, including
credit reports, HUD-92013-SUPP forms, and financial statements including verifications of
deposit or available liquidity are not required of board members or officers of nonprofits.
Officers will only provide the previous participation certification.
2. Where a nonprofit is not a Principal but proposes a role such as property manager, service
provider, or an intermediary with a local community or constituency, the nonprofit must
demonstrate experience, management ability and financial capacity to execute the proposed
services. For its role as property manager, the non-profit entity and its officers must provide
the previous participation certification.
E. Definition of Principal for Regulatory Agreement Provision Section 50.
1. For privately held entities: The provision generally requires two signatures for project sponsors.
In most cases, HUD, upon the lender’s recommendation, shall approve an individual signatory
to sign in his or her individual capacity and the project parent/sponsor entity to sign in a
corporate capacity. In any specific deal, underwriting may conclude that an entity with the
requisite control and involvement or interest in the Project which possesses a positive credit
history and adequate financial strength relative to the size of the loan may serve in the capacity
required by Section 50. In some circumstances, particularly involving large, capitalized, and
experienced corporate entities with complex corporate organizational structures, the
underwriting may not reveal any apparent individual to reasonably serve in the required capacity,
whereas the parent/sponsor entity itself may possess such necessary characteristics to act as the
sole necessary signatory.
The lender may consider whether the entity has been approved as an appropriate signatory to
provisions similar to Section 50 in a recent Government Sponsored Enterprise (GSE)
transaction. A GSE transaction means any Fannie Mae or Freddie Mac loan program, such as
DUS or Risk Sharing, in which they have approved the signator on their comparable carve out
provisions. We will also consider the Federal Home Loan Bank as a GSE, if they also have
similar approval. The GSE-approved entity may be an appropriate sole signatory for Section 50
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if they have positive credit history and adequate financial strength. A copy of relevant excerpts
from the recently-closed transactions would evidence such GSE approval.
2. For publicly traded corporations, REITs (Real Estate Investment Trust), or nonprofit
organizations: The parent/sponsor entity itself is acceptable as the sole signatory. For such
entities, any individual signing on behalf of the corporate entity does not sign in an individual
capacity, but to bind the parent/sponsor. No personal liability will be claimed against the
individuals signing in such a capacity.
3. For nonprofit borrowers, the parent/sponsor entity should be named. The Single Asset Mortgagor
Entity should not be the signatory named in Section 50.
4. For any corporate entities required to execute Section 50: An officer or entity or other person
authorized to bind the company in connection with the proposed transaction may sign.
5. The following prohibitions relate to Section 50:
a. Insertions of “or successors” language to the identification of signatories is not allowed. The
Regulatory Agreement can and should be amended when there is a new individual who is
responsible for the provisions of Section 50.
b. Riders to the regulatory agreement that attempt to limit a signatory’s liability are not allowed.
c. Section 50 may not be omitted simply because a currently insured project has been processed
as a Section 223(a)(7).
6. The lender is responsible for the mortgage credit review of the parent/sponsor entity and to
identify and verify the identity of the signatory of Section 50 of the Regulatory Agreement. The
signatory will be identified in a special condition to the Firm Commitment (or in a letter
Amendment to the Firm Commitment).
8.4
Investigating Credit and Character
The MAP Lender’s underwriter is responsible for analysis and review of the mortgage credit exhibits,
identifying credit issues and/or resolving discrepancies in order to determine that the Borrower and the
Principals have demonstrated: (a) both the willingness and the ability to pay creditors in accordance with
agreed terms, (b) the ability to deliver timely and satisfactory performance of contractual or business
obligations, and (c) the mitigation of litigation risks by honoring prior loan obligations (especially during
adverse market/financial conditions).
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A. Use of Credit Reports and Credit Investigation.
1. Credit reports or credit histories are a means of validating and cross checking information received
from the Borrower and Principals in financial statements and in application exhibits. Credit reports
give a picture of payment history and financial interactions with creditors. The lender must reconcile
any contradictions with a summary statement.
2. A commercial credit report for a business or a residential mortgage credit report (RMCR) for
individuals must be current within 60 days of the application acceptance date, and HUD may
require updated reports during processing. Merged credit reports from the three major credit
bureaus are acceptable, but compiled infill reports are not acceptable. Infill reports have the
potential of containing select or less reporting rather than the full reporting as in a single credit
report.
3. For Principals who are individuals, credit reports are needed for the individual and for that
individual’s other business concerns (i.e. ownership of property management firm, general
contracting or subcontracting firm, or land or property development entities, etc.). The lender
should randomly select 10% or more of these other business ventures or property operating
companies for credit review. The report should contain information on pending judgment(s), legal
actions or suits or bankruptcy claims should be included in the report.
4. The general contractor’s credit reports are required on the business entity/firm and its operating
affiliates, if any. The Lender must provide credit reports for Principal(s) of the general contractor
if the financial capacity and track record of the general contractor entity is deemed insufficient to
assess a credit risk.
B. Lender’s Review of the Credit Report. The lender is required to do all of the following:
1. Compare all information obtained from credit reports and histories to the financial statements
provided by the relevant borrower or principal(s). Resolve or explain contradictory information.
2. Make reasonable inquiries to determine if the applicant or any principal is in default on any type of federal
debt including direct loans, HUD insured loans, student loans, Small Business Administration loans or
judgment liens against the property.
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3. Investigate any adverse credit information that appears on the credit report and obtain a written
explanation of any late payments, actions, judgments or derogatory information.
C. Delinquent Federal Debt, Judgments and Pending Litigation.
1. When delinquent federal debt is identified, the lender must include as part of the required
application exhibits:
a. A detailed written explanation from any applicant or principal with a prior federal default or
claim, or whose credit report and financial statements contain conflicting or adverse
information;
b. A letter from the affected agency, on agency letterhead and signed by an officer, stating the
delinquent federal debt is current or satisfactory arrangements for repayments have been made;
and
c. The lender’s reason(s) for recommendation of the applicant, which may be included in the
lender underwriter’s review and recommendation.
2. The lender shall also investigate any other serious adverse information, including but not limited to
bankruptcies, defaults on real estate mortgages, tax liens, foreclosures or deeds-in-lieu of
foreclosures, and judgments and pending litigation.
D. Trade and Credit References.
1. HUD requires a completed Fannie Mae Form 1006, Request for Verification of Deposit or bank
statements to verify Borrower’s/Principal’s liquid assets for each bank account listed in the credit
report. Deposits and/or marketable securities of the Principal must be verified and examined in
light of the Principal’s liquid assets reported on financial statements. Both sources should be
reasonably consistent, and any significant differences should be explained. When Principals’
financial statements show real estate owned and other mortgage debt, credit references must
include a sampling of mortgage payment histories and must confirm the character, business
acumen, expertise and timeliness of the Principal in meeting their business obligations.
2.
In instances where insufficient trade, credit or bank data is available to make a creditworthiness
decision, a credit report with sufficient data may be used in place of trade references.
3. Written inquiries of trade references should include a copy of the certification authorizing the
release of credit information.
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E. Rejection Because of Unacceptable Character and Credit.
1. The lender’s professional judgment is required in approving or rejecting Principals on the basis of
character and credit.
2. The Principal should be a credit rejection if:
a. The Principal has a history of late payment or non-payment of creditors, or has defaulted on debt
without making reasonable attempts to remedy or cure the default. The lender’s underwriter
may not recommend approval of a Principal with a history of default without contacting the
defaulted lender to determine the circumstances surrounding the default with a summary of
these discussions included in the lenders narrative.
b. Delinquent federal debt has not been resolved or satisfactory arrangements made for repayment.
c. There are judgments or actions against the party, which:
(1) Could significantly impact the financial position of the individual/ firm or corporation, or
(2) Result in a determination that the individual/firm or corporation is an unacceptable credit
risk.
d. The Principal is insolvent or is the subject of a pending bankruptcy or insolvency proceeding at
the time of application, issuance of the Firm Commitment, or at the time of loan closing.
e. The MAP Lender is responsible for amending or withdrawing the Commitment application if
there is a material adverse change in the Borrower’s credit after application submission.
3. Principals with repaired credit may be considered for approval provided that a positive credit
history has been established and sustained for a period of time encompassing both favorable and
unfavorable economic conditions and that the principal has during that time been engaged in
financial transactions and/or business enterprise comparable in scale to the proposed insured
mortgage transaction. It is unlikely that this period of time would be less than 7 years.
4. Departmental Enforcement Center (DEC) Referrals. The MAP lender should discuss with the
borrower and its Principals to ensure that any matters pending with the DEC relating to the
borrower, the management agent and/or the Project have been resolved.
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Evaluating Financial Capacity: Analysis of Financial Statements
The financial statements should be reviewed to determine if the Borrower, and/or the Principals have the
financial capacity to own and operate the property. For construction proposals, an analysis of financial
statements is used to determine whether the owner and the general contractor have the singular ability to
deliver the project. Financial analysis is performed on Active Principals as identified in the borrower
entity’s organizational structure. The lender’s underwriter must determine which Principals have control
of the single asset entity and the property, and must assess their financial stability and how it will impact
the risk to FHA, and must review their financial statements along with these schedules. Also, the
underwriter must analyze and disclose to HUD as part of their recommendation any financial interests that
do not rise to the level of Principal, but nevertheless have a material impact on the creditworthiness of the
proposed Borrower or its Principals.
These determinations are based on:
a. Past financial condition,
b. Present liquidity, and
c. Projected future financial capacity.
A. Submission of Financial Statements- General.
The Borrower (if fully capitalized) and/or its Principals and the general contractor must submit with
the loan application current financial statements to include a balance sheet, income and expense
statement, supporting schedules, a REO schedule and the schedule of mortgage debt. Individuals will
submit a Personal Financial and Credit Statement, Form HUD-92417 (or an acceptable form of
financial statement e.g. balance sheet that contains a certification and criminal warning statement.) and
if applicable an REO schedule and schedule of mortgage debt. See Appendix 8C for detailed
requirements.
The financial analysis is used to determine the amounts available for investment in the project by
performing an analysis of working capital. Working capital is the difference between current assets and
current liabilities and is the cash or liquidity that exists to purchase assets, pay off debt and make up
deficits from operations or fund new activities or projects. The financial analysis also determines which
non-pledged assets can be readily used as collateral or pledged as security to obtain cash. See Appendix
8B for instructions on how to correctly analyze financial statements when determining the financial
capability of the borrower, Sponsor, General Contractor and/or Manager of an LLC.
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B. Section 223(f) Project Financial Statements.
1. The borrower must submit:
a. The last 3 fiscal years financial statements on the project and if more than 3 months have
elapsed since the closing date of the most recent financial statements, submit a year-to-date
balance sheet and operating statement,
b. Copies of the most recent insurance and property tax bills, and
c. 3 years of tax returns for the property or borrowing entity.
2. If the 3 years of financial statements are audited by an independent CPA or IPA, no further review
is needed to validate the statements. If the statements are not audited, a CPA or IPA “reviewed”
statement is required.
3. For refinance applications, if the financial statements are not audited, submit a CPA or IPA
“reviewed” statement for the last complete fiscal year. “Audited,” and “Reviewed,” are defined
professional standards for reports understood by CPAs. The intent of this requirement is to obtain
an independent (non-identity of interest) professional review of the financial statements certified
by the Owner.
4.
Year-to-date financial statements may also require CPA or IPA review, or if the project has a
history of stabilized occupancy and financial performance, and borrower-certified year-to-date
statements may also be acceptable. Examples of when year-to-date financial statements might
require CPA or IPA review include factors such as: 1) period covered is all but the last month of
the fiscal year, 2) there is a soft market or case-specific risk factors, and 3) the project is applying
under the three-year rule waiver and has just reached sustaining occupancy. For this purpose
“CPA reviewed” means a review by a Certified Public Accountant and “IPA reviewed” means a
review by an Independent Public Accountant of the records and statements of the Borrower
specifically including:
a. The property’s financial statement(s) for the period;
b. Rent rolls for each month of the period;
c. Bank statements for not less than the last 6 months of the period;
d. The Borrower’s income tax return for the last fiscal year; and
e. Reconciliations of rent rolls to financial statements and financial statements to
normalized operations, cash receipts and tax returns.
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5. There may be circumstances beyond the Borrower’s control where the required financial
statements are not available because of loss by fire, arson, theft, flood event etc.
a. The Borrower must submit:
1) Evidence satisfactory to the lender that the financial statements are not obtainable; and
2) Project financial statements that are available including an owner-certified balance sheet
and operating statement.
3) The past 3 years of tax returns for the property and the borrower entity.
b. Lender’s case file must contain a statement from the Borrower that explains why all the
required records are not obtainable and a memorandum from the underwriter to the Regional or
Satellite Office Director stating that he/she has evaluated the borrower’s statement and agrees
that the information is not available.
6. Any owner-certified financial statement or owner-certified balance sheet and operating statement
must include certification and criminal warning found in Appendix 8C at C.4.b.
7. Past Due Payables and Past Due Project Liabilities. Past due accounts payable and outstanding
liabilities for project operating expenses must be cleared and released, or otherwise fully resolved,
before or at Initial Closing. Examples of such items include deferred management fees, over-due
utility bills or real estate taxes, and trade payables. These items are not to be included in the
eligible debt basis in the calculation of the cost of refinance/ acquisition.
8. If the transaction does not involve a Transfer of Physical Assets (TPA), and if approved by the
Regional Center Director, surplus cash notes may be established for payables owed to a related
entity. Accounts payable and outstanding liabilities that are not past due do not need to be
resolved at or before closing.
C. Review of Financial Statements and Other Documents.
1. A current financial statement must be no more than 3 months old when Form HUD-92013 is
submitted to the lender for Firm Commitment review. The lender must determine financial
stability and financial strength, unless the Active Principal and/or the Sponsor are a public
company with an investment grade credit rating.
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2. Exceptions:
a. The credit investigation or other circumstances may warrant more current financial statements.
1)
2)
Assess the adequacy of each Active Principal’s liquidity and its ability to provide
immediate and ongoing support to the property, as well as to any asset that is in
financial difficulty. For those properties in financial difficulty, consider that property’s
strength as well as liquidity sources outside the property, such as the Principals and/or
the Sponsor, as applicable. The lender must look for likely future events that may drain
cash resources from the Principals.
The lender may include other sources of Principal cash flow in the analysis, if the
source and stability of the cash flow has been verified by reviewing historical tax
returns. Do not include interest income from notes receivable, real estate investment
income, dividend income and Principal salaries.
b. Audited or reviewed financial statements prepared by a CPA or IPA may be up to 1 year old.
The audited or reviewed statements must be supplemented with year-to-date financial
statements and supporting documentation, which may be management agent-prepared if more
than 6 months have elapsed since the closing date of the audited statement.
3. A Borrower that is fully funded with adequate capital in an account in the name of the Borrower
must still provide financial statements on the Principals.
4. Make a working capital determination for the Borrower, its Principals and the general contractor
based upon a review of the financial statements. Adjust the net working capital for the effect of
contingent liabilities and the financial needs of other projects in the planning stage or under
construction, adjusted by the percentage of completion.
5. Net worth in lieu of working capital (hypothecation of fixed assets) occurs when existing assets
can secure loans or lines of credit to cover the project’s financial requirements and such loans or
lines of credit are confirmed as being available. In this case, the underwriter should recommend
approval based on “true net worth” rather than on working capital; and require the Active
Principal to provide a commitment letter from a lending institution that states:
a. The rate, amount, term and conditions, if any, of the loan that the lending institution is willing
to provide.
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b. The date by which the commitment letter must be exercised. The date must extend at least to
the anticipated date for initial endorsement.
c. The party that will be responsible for repayment of the loan or line of credit, if the commitment
is exercised.
1) Repayment may not be an obligation of the borrower entity.
2) A certification indicating that the lending institution will not make any claim against
the mortgaged property, mortgage proceeds, any reserve or deposit required by HUD,
or against the rents or other income from the mortgaged property for payment of the
loan or line of credit. This certification must contain the criminal certification found in
Appendix 8A.
6. Funds provided by a parent company/Sponsor or affiliate of the Principals will require a
certification from the Board of Directors or authorized agent that specifies the funds the parent
company/Sponsor or affiliate will commit. Establish the availability of funds from the parent
company/affiliate. Consider whether:
a. Individual corporations have any excess operating capital (e.g. restricted assets);
b. Laws under which they are incorporated or their banks permit:
1) Withdrawals, loans or advances to owners or sponsors.
2) Stock investment in affiliated corporations.
3) Guarantee of debts of associated corporations.
D. Letters and Lines of Credit.
1. Letters of intent and letters of credit cannot be used to establish financial capability. At initial
endorsement, however, letters of credit may be substituted for cash to set up many of the escrows
required at initial and final endorsement, or during construction. If a Borrower chooses to use cash
at initial closing to satisfy the escrow requirement, a letter of credit cannot be substituted to
establish the same escrow requirement.
2. Ratings and requirements for bank issued letters of credit. When a letter of credit is permitted, the
ratings and requirements for banks issuing letters of credit for all multifamily project escrows must
meet the following Ginnie Mae criteria:
a. Unconditional and irrevocable;
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b. Issued by a bank in a Ginnie Mae rated institution which are insured depository institutions,
which can include FDIC or National Credit Union Administration, with a rating that is
acceptable to HUD (refer to Ginnie Mae Handbook 5500.3 Rev. 1, Chapter 16-8 dated
04/03/15, and Chapter 31-15(B) dated 09/18/15 for details);
c. Is deposited into a non interest bearing account; the institution does not have to be fully insured
by the United States of America;
d. Valid and collectible; and
e. Have a 12-month term that is renewable up to the period of the escrow or of the borrower’s
obligation and is acceptable to HUD.
f. The format of the letter of credit must follow that in Ginnie Mae Handbook 5500.3, REV-1
Appendix VI-3;
g. The Issuer must be named as beneficiary.
The Issuer must execute, in blank, a Transfer of Letter of Credit using the format included in
Appendix VI-3, the original of which must be filed with the document custodian; and
h. Any substitute letter of credit or extension that changes the letter of credit number or any terms
or conditions of the letter of credit will require a new execution in blank and filing of a
Transfer of Letter.
The requirements for depository institutions and deposit accounts are in found in the current
Ginnie Mae MBS Guide for Issuers, 5500.3. It is available on Ginnie Mae’s website at the
following
link:
http://www.ginniemae.gov/doing_business_with_ginniemae/issuer_resources/Pages/MBSGuideLi
b.aspx.
3. The lender of record (as having a financial stake in the Borrower’s position) may not be the issuer of
any letter of credit without prior written consent of the Regional Center Director. Such consent will be
granted only on an exception basis with sufficient investigation about a potential conflict of interest. If
a demand under any letter of credit is not met immediately, the lender must provide the cash equivalent
to the remaining balance of the letter of credit.
However, for tax credit transactions only if the Borrower uses a letter of credit as the form of assurance
of completion and also requires an equity bridge loan, a tax credit syndicator may be the bridge loan
lender and the issuer of the letter of credit. In this case the tax credit syndicator represents the
Borrower’s interests (as the equity investors have a strong identity with the Borrower.) Conversely the
FHA lender represents HUD’s interest. Subject to a determination of the Borrower’s creditworthiness,
HUD would permit the syndicator to provide both an equity bridge loan and a letter of credit, so long
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as the project is not used as collateral. Chapter 14.16 provides details with respect to the terms and
timing of equity bridge loans.
4. Lines of Credit. On an exception basis and with prior written consent of the Regional Office
Director, existing lines of credit may be used to establish a portion of the principal’s financial
capability. With the Firm Commitment application, the lender must have the principal provide a
letter from a lending institution that confirms:
a. The existence of the line of credit, original amount and available balance, repayment terms,
and expiration date.
b. The line of credit expiration date cannot occur prior to project completion.
E. Sponsor’s Continuing Commitments.
1. Continuing Commitments. A written statement must be submitted from Active Principals that are
Sponsors who are relied on for financial capacity indicating the parameters of their financial
commitment to and contractual relationship(s) with the Borrower:
a. If the relationship is not intended to continue until the project reaches sustaining occupancy,
the financial requirements have not been met.
b. Any Sponsor relied on for financial support but not having an ownership interest in the
Borrower must also certify in writing the amount of funds it will commit.
2. The Firm Commitment will contain special conditions to ensure the contractual association of the
Sponsor to the project:
a. The condition must indicate that the withdrawal of any individual/firm relied on for financial
capacity requires prior HUD approval.
b. Identify the individuals/firms relied on for financial capacity. For confidentiality reasons, do
not indicate their alphabetic designation or their dollar contribution as they are listed in the
Remarks Section on Form HUD-92264-A.
c. Indicate that the withdrawal of any individual/firm relied on for financial capacity could result
in HUD declaring the Firm Commitment null and void.
d. Require organizational documents reflecting such continuing contractual relationships, (i.e. for
nonprofits).
e. If there is a change in sponsorship of the individuals/firms relied on for financial capacity and
the remaining Principals do not demonstrate the capacity to meet the financial requirements of
the project.
f. At any stage through Firm Commitment this is considered a significant deviation from the
original proposal and a cause for rejection of an application.
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g. After the issuance of the Firm Commitment, but before Initial Endorsement occurs, this is
considered a significant deviation from the application for which the commitment was issued and
may be cause for declaring the Firm Commitment null and void.
3. Individuals are prohibited from submitting financial statements as Sponsor and then abandoning
the project and the Borrower after the Firm Commitment is issued. The lender should require a
certified statement from such Sponsor stating their commitment to the project and specifying the
amount of funds that will be reserved for contingent needs through Final Endorsement and
sustaining occupancy.
4. The submission of a financial statement that is used to influence Federal Officials concerning a
mortgage insurance risk determination when the Sponsor does not plan a continuing relationship
with the borrower could result in appropriate sanctions being taken against the sponsor including
suspension or debarment.
5. General Contractor with Adequate Capital. The general contractor’s adjusted working capital
position should equal 5% or more of the estimated construction contract.
a. The instructions for hypothecation (See Section 8.5.C.4) of fixed assets may be applied if the
general contractor does not have an acceptable working capital position.
b. The general contractor’s ability to obtain a performance-payment bond does not negate or
lessen this requirement.
c. The working capital amount should be adjusted for projects in construction.
d. If the general contractor does not have an acceptable working capital position or sufficient
fixed assets that can be hypothecated, a joint venture may be established with a financially
stronger general contractor provided these firms’ combined working capital equals at least 5%
of all construction contract amounts for projects in construction and development.
e. Waiver of the working capital requirement is reserved to Regional Center Directors, and will
be considered only when there are specific strongly supported mitigating factors.
6. In the case of LIHTC, Historic Tax Credit or New Market Tax Credit transactions, the application
may include a Letter of Commitment to fund the required equity from a tax credit equity
syndicator or investor. This Letter of Commitment must specify the equity amount, pay-in
schedule and other relevant details such as conditional equity pay in benchmarks, so that HUD and
the lender can verify the availability of sufficient equity in a manner that meets HUD's
requirements. The syndicator will typically assess the appropriate amounts of reserves at both the
property and fund levels and perform certain asset management functions, including the
replacement of non-performing general partners. The lender may also require additional
documentation (e.g. financial statements, etc.) of a syndicator or investor to demonstrate their
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ability to make the future equity installments. See Chapter 14 for further guidance on underwriting
an application with tax credits.
The lender should focus on and evaluate the tax credit syndicator’s or the direct investor’s
financial strength, experience, reputation and asset management capabilities, if they have the
majority ownership interest in the borrower entity, as addressed in Section 8.3.
7. Real Estate Owned (REO) Schedule and Mortgage Debt Schedule. The purpose of requiring the
REO and Mortgage Debt Schedules is to determine an Active Principal’s exposure to risk
associated with real estate (e.g. multifamily, assisted living, commercial, office, undeveloped land,
and new construction versus stabilized properties, etc.). Generally, the REO Schedule lends
credibility to asset values reported on the principal’s financial statements by requiring detailed
information on each real estate asset, and serves as a cross-check to the financial statements. The
mortgage debt schedule should include loans that are maturing, or have floating-rate resets, within
the next 5 years. Other debt that has a material impact on the Principals’ creditworthiness should
be included as well (e.g. if they are in default or are likely to have problems with a loan over the
next few years) to determine if any of the properties should be classified as a troubled asset. A
troubled asset is one that has, or is likely to default on its mortgage obligations, or has significant
financial management or operational problems. The credit evaluation shall include:
a. An analysis of the various properties’ net operating income, outstanding indebtedness, cash
flow and valuation estimates must detail and support the lender’s assessment of the likelihood
of the Borrower’s successfully refinancing projects that have maturing balloon debt, assuming
current capital markets conditions and current availability of alternative long term financing
sources. The analysis should give particular attention to Principals with a history or
anticipated incidence of adverse credit actions including (but not limited to) bankruptcies,
foreclosures or a pattern of renegotiating debt.
b. A financing plan should include both conventional financing and other FHA insured loans for
any shortfall or anticipated lack of available credit.
c. An analysis of large nonprofit or for-profit entities/ owners with large portfolios and audited
summary financial statements is required. Generally, the lender can provide summary data,
including a description of exposure to maturing debt obligations, a detailed listing and analysis
of troubled projects, including those with recent or anticipated defaults or other material
adverse actions.
d. If a tax credit syndicator is identified, the lender’s underwriter will also need to provide a brief
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8.6
Prior Approval of Principals/Borrowers with
FHA-Insured Balances Greater than $250 Million or 25
or More Commercial Real Estate Assets
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overview and analyses of the entity. Typically a tax credit syndicator is an investor
intermediary with only a limited ongoing obligation to LIHTC rental properties. Accordingly
an REO schedule is not required for tax credit syndicators or investors. However, the
syndicator’s liquidity, track record, asset management and monitoring capability and ability to
perform on its commitment to provide equity to the borrower after Initial Endorsement is a
material issue for HUD Senior Underwriter’s analysis of the tax credit investor/LP. See
Chapter 14 for more details.
e. The lender may present the REO and mortgage debt schedule in tabular format containing the
information covered below and any other information sufficient to present their analysis and
conclusions. Typically, the format is a spreadsheet accompanied by a summary description
and analysis of each project. When the REO schedule materially differs from the financial
statements, and are not minor variations arising from timing of statements or changes in
principal balances, then the lender should investigate, reconcile and explain the differences.
Refer to Appendix 8C for the itemized physical property list and the schedule of mortgage
debt.
8.6
Prior Approval of Principals/Borrowers with FHA-Insured
Balances Greater than $250 Million or 25 or More Commercial
Real Estate Assets
A. Particular attention and additional scrutiny to mitigate risks must be given in cases where Principals
with greater than $250,000,000 of outstanding FHA insured debt propose to submit loan applications
for FHA mortgage insurance. Lenders must perform a thorough mortgage credit review and obtain
HUD approval before submission of the application. In cases where Principals have greater than
$250,000,000 of outstanding FHA insured debt, the lender must not adjust for a Principal’s fractional
ownership percentage. Based upon the lender’s review of the Principal’s Schedule of Real Estate
Owned (REO), the lender must identify Principals (including Principals or investors with less than
25% of ownership interest but as a practical matter have control or influence over the development
and/or operation of the project) with FHA insured assets that exceed the $250,000,000 threshold.
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B. Principals of a borrowing entity with less than a 25% ownership interest but possessing a substantial
financial interest by infusing equity in an FHA-insured transaction, and/or having decision making
authority will undergo review. This may include the following types of principals:
1. Investors that have exceeded the $250,000,000 threshold and wish to invest in a project as a
passive investor with less than a 25% interest.
2. An investor qualifying as a key financial partner from both a financial strength standpoint and cash
requirement contribution but still maintains an ownership interest of less than 25%.
C. The lender must first submit their presentation for prior approval to the HUD Regional Center with
jurisdiction. The Regional Center will then forward this presentation to HUD Headquarters Office of
Multifamily Housing Production for approval and return the approval memorandum to the Regional
Center and lender. The presentation must address the following items:
1.
2.
3.
4.
An analysis of the Principal’s financial strength, credit history and experience.
An account of all insured and conventional debt on the REO schedule.
An explanation of mortgage debt, e.g. type, maturity, age, interest rate.
A full review and analysis of the operating performance and physical condition of the Principal’s
existing insured properties.
5. An analysis and projection of the Principal’s cash flow and liquidity for the estimated period of
time required for proposed insured projects to achieve sustaining occupancy.
6. Previous Participation, Form HUD-2530.
D. Appendix 8D sets forth the instructions and program requirements for applicants to file a prior
approval application to the HUD Regional Center with jurisdiction. The Appendix provides guidance
on mandatory and voluntary prior approval, the scope of review, the reviewing authorities, use of the
approval once granted, the duration of approval, loan committee actions, lender fees and the appeal
process.
E. Applicability. Prior approval applies to all applications for all MAP multifamily insurance programs,
except for refinancing pursuant to Section 223(a)(7). However, in determining whether a Principal
meets the threshold of insured loans totaling $250,000,000 or more, lenders must include all FHA
insured loans in the total, including healthcare loans (but not including Housing Finance Agency or
Government Sponsored Enterprise risk-sharing loans). The prior approval will be effective and may
be relied upon for 24 months or lesser period specified by HUD, from the date of the credit approval.
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Secondary Financing
The amount, form, terms and conditions of any permitted secondary financing must comply with the
guidance herein and 24 CFR Sections 200.71 and 200.85. This section details new source(s) of secondary
funding. Except as specifically noted in this section, the term of any subordinate loan may not mature
before the term of the HUD-insured first mortgage. Additional secondary financing guidance for Low
Income Housing Tax Credit projects may be found in Chapter 14.14.
A. Public Sources. For all Sections of the Act (SOA), when secondary financing is funded by sources
such as HOME funds, Affordable Housing Program, Federal Home Loan Banks (FHLB), Grants, or
other quasi-public, federal, state, or local governmental sources:
1. The subordinate loan must be documented by a promissory note (Form HUD-92223M, Surplus
Cash Note) and may be secured with a mortgage lien as prescribed by the governmental funding
source and reviewed and approved by HUD by Form HUD-92420-M, entitled “Subordination
Agreement.”
2. Secondary financing (or grants lent to the property as a secondary loan) may be used to offset up to
100% of the applicable SOA equity requirements, and may also be used to finance nonmortgageable costs, which when added to the HUD mortgage and required equity contribution,
may exceed 100% of the project’s Fair Market Value (FMV) or Replacement Cost. None of these
sources may be substituted for Tax Credit Equity and all remain subject to the 75% cap on
payment from surplus cash.
3. Non-mortgageable costs (i.e. replacement cost items, not eligible for inclusion in the HUD insured
loan) to be financed by the secondary loan, must be certified by the funding source to be
reasonable and necessary to complete the project. Documentation to this effect must be included
with the application submission.
4. The term of a subordinate loan should generally not expire before the term of the HUD insured first
mortgage. The underwriter may consider exceptions on a case-by-case basis for public debt when
other HUD programs (e.g., the HOME program) require shorter amortizations and the risk is
mitigated. Examples of mitigants include items such as significant additional public funds, low
loan-to-value or loan-to-cost ratios, below market rents or higher than minimum debt service
coverage.
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Where the source of the secondary financing is HOME program funds, HUD will permit the
Rider/Restrictive Covenant Agreement to be modified such that the restrictive covenants are not
subordinate to the FHA insured security instrument. Additionally, HUD will permit the
Restrictive Covenant Agreement with a modified Rider/Amendment to Restrictive Covenants to
be recorded prior to the FHA insured Security Instrument in order to ensure that the affordability
restrictions will not terminate in the event of a foreclosure of the FHA-insured first loan.
B. Private Sources – Section 223(f).
1. Secondary financing from a private lending source must be evidenced by a promissory note (Form
HUD-92223M, Surplus Cash Note) that may not be modified or altered in any manner without the
written consent of HUD. The promissory note must be accompanied by the required secondary
financing rider; a sample of the rider is found in the Multifamily Program Closing Guide as Part
5.l.
Private secondary financing is permitted to offset mortgageable and non mortgageable costs up to
the difference between the loan-to-value percentage and a maximum combined debt of 92.5% of
the FMV, except in instances when private secondary financing is combined with federal, state or
local governmental agency secondary financing. (In these instances, the governmental loan, in
aggregate with the HUD first and private second, may exceed the property’s FMV.) The 92.5%
limitation on combined debt does not apply to Low Income Housing Tax Credit transactions, in
which primary and secondary debt together may equal but not exceed 100% of total development
costs. (See Chapter 14 for details.)
2. Private secondary financing up to 92.5% total LTV (including both HUD-insured and private
secondary financing) may be secured by a lien encumbering the real property.
NOTE: Except for the limited instance in Section 8.7.C below, secondary financing from private
sources is not permitted under any other SOA.
3. Mezzanine Financing. Mezzanine financing is a subordinate loan usually secured by a pledge of
ownership interests, rather than by a secondary lien on the real estate or an obligation of the Single
Asset Mortgagor Entity. Mezzanine debt terms must be fully disclosed to and approved in writing
by HUD. Any mezzanine debt that remains from a previous financing of the property is subject to
the secondary financing guidance in this section. Payments on mezzanine financing may be made
only from surplus cash, and the debt may not mature before the FHA insured loan. Mezzanine
loan interest rates will typically be higher than that of the first mortgage, but must be reasonably
consistent with market rates for mezzanine debt. Additionally the interest rate must not be so high
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that it jeopardizes the ownership stability of the property, or that the interest due cannot reasonably
be expected to be repaid from surplus cash. Interest due or accruing on the mezzanine loan must
be approved as reasonable by HUD.
In the event of nonpayment or default on the mezzanine debt, any transfer of an ownership interest
in the borrower entity or in its principals to the mezzanine lender must have prior written approval
by HUD, through the Transfer of Physical Assets (TPA) process. The mezzanine lender may
exercise no enforcement remedies against the real estate or against the borrower entity during the
term of the mezzanine loan, nor may the mezzanine lender take action that would trigger a
Transfer of Physical Assets (TPA) without HUD approval.
NOTE: Project-specific exceptions or waivers to these policies for mezzanine financing must be
approved in writing by HUD, and documented in a HUD-2 waiver form.
C. Private Sources -- New Construction/Substantial Rehabilitation. Private secondary financing is not
permitted under Section 221(d)(4) or other new construction/substantial rehabilitation first mortgage
programs. The only exception to this consideration is Seller-financed secondary debt (aka seller take
back note). The Seller-financed secondary debt must meet both of the follow criteria:
1. The FHA loan to replacement cost is less than 50% (80% loan ratio for tax credit applications) of
the mortgageable cost; and
2. The Seller financed secondary debt is either:
a. An arms-length transaction; or
b. It involves an identity of interest transaction, and the selling price of the land or building is not
greater than the property’s “as is” value.”
3. Seller-financed subordinate debt must also meet all of the following:
a. It is an inferior cash flow debt, i.e. payments only from up to 75% of surplus cash, if available;
b. It is documented in a promissory note that is not recorded and not secured with a lien against
the property;
c. It does not contain any provision of foreclosure that would threaten the first mortgage;
d. It is subject to automatic re-subordination in any subsequent refinancing of the first mortgage;
and
e. The subordinate debt does not have a balloon payment or maturity prior to maturity of the
FHA-insured first mortgage.
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D. Section 223(a)(7) Refinance Program. For Section 223(a)(7) applications, secondary financing terms
are governed by the SOA of the underlying insured mortgage, but shall not be used directly or
indirectly to provide funds for an equity takeout or a Transfer of Physical Assets.
E. Commitment Condition for Repayment of Public or Private Secondary Financing. Required
repayment of this and any other secondary debt, including interest, must be made solely payable from
up to 75% of available surplus cash. Consider using Form HUD-92223M or including the following
language in the secondary financing promissory note, or otherwise ensure the transaction provides for
the following:
"So long as the Secretary of Housing and Urban Development or his/her successors or assigns,
are the insurers or holders of the first mortgage on (insert project name and FHA Project No.),
payment(s) due under this Note, any secondary debt instruments shall be payable from up to 75%
of available surplus cash. Non-project sources that are outside the Mortgaged Property may also
be used to repay subordinate financing. The term surplus cash is defined in the Regulatory
Agreement dated (insert date) between HUD and (insert name of borrower). The restriction on
payment(s) imposed by this paragraph shall not excuse any default caused by the failure of the
maker to pay the indebtedness evidenced by this Note."
This language does not need to be added to the Subordination Agreement (HUD-92420M) or the
Secondary Financing Rider found in the Multifamily Program Closing Guide, Part 5.1.)
F. Secured Public Secondary Financing Conditions. The borrower may secure a Surplus Cash Note
(HUD-92223M) with a subordinate lien from a governmental agency against the property under the
following conditions:
1. The lender on the insured mortgage must consent to the placing of the subordinate lien and agree
that its existence could not create a basis for default on the first mortgage.
2. There must be a simultaneous closing of the subordinate financing documents and the insured first
mortgage loan documents. Both the subordinate and first mortgage closing documents must be
recorded either before or after closing. Please note that recordable closing documents are
frequently recorded in advance of actual closing, however funds do not flow until closing.
3. The terms of the subordinate mortgage must be:
a. Approved by the Field Counsel;
b. Consistent with the terms of the insured Surplus Cash Note, the first mortgage, the Regulatory
Agreement and all HUD regulations and requirements.
c. The subordinate mortgage shall not contain a cross default provision or any right of foreclosure
before the termination of the FHA insured mortgage.
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d. The term of the subordinate mortgage must be extended, if:
1) The Promissory Note is due, and there are no surplus cash funds or residual receipts
available for repayment, and the first mortgage has not been repaid in full. (Distribution of
residual receipts must be approved by HUD Asset Management and can only be approved
by the terms of a written agreement between HUD and the owner.)
2) HUD grants a deferment of amortization or forbearance that results in an extended maturity
of the insured mortgage.
3) The maturity date of the subordinate mortgage is prior to the term of the FHA-Insured
mortgage.
e. The subordinate mortgage must be assumable when a sale or transfer of physical assets occurs
and the insured mortgage remains in place.
1) The holder of the subordinate mortgage cannot require that more than 75% of the net
proceeds of the sale or transfer be applied to the reduction of the loan.
2) For these instructions, net proceeds are the funds available to the original borrower after:
(a) Correcting any monetary or covenant default on the first mortgage.
(b) Making:
(i) Required contributions to any reserve funds.
(ii) Needed improvements to the property as evidenced by HUD's annual inspection
reports.
f. The subordinate mortgage must automatically terminate if HUD acquires title to the project by
a deed in lieu of foreclosure.
g. No more than 75% of surplus cash may be pledged to the repayment of the subordinate loan(s).
G. Unsecured Private Secondary Financing Conditions. Terms of unsecured private Promissory Notes
must reflect those provisions found in: Form HUD-91710M, Residual Receipts Note [Non-profit
Borrower], or Form HUD-91712, Residual Receipts Note [Limited Dividend Borrower], or Form
HUD-92223M, Surplus Cash Note [Profit Motivated Mortgagors] based upon the type of borrower; or
must include the terms set forth in the Secondary Financing Rider. See the Multifamily Program
Closing Guide, Part 5.
1. Form HUD-91710M, Residual Receipts Note (for Non-profit Mortgagors) and Form HUD91712M, Residual Receipts Note (for Limited Dividend Mortgagors).
a. Principal and interest shall be due and payable on or after the maturity date of the HUDinsured mortgage.
b. If the HUD-insured mortgage is prepaid in full, the holder of the residual receipts note has the
right to declare the entire principal sum or any remaining balance including any accrued
interest immediately due and payable.
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c. Prepayments to principal and interest:
1)
may be made (a) from the residual receipts as defined in the Regulatory Agreement only
after obtaining written approval from HUD or (b) from sources other than Project Income
or Project Assets, e.g., syndication proceeds.
2)
may be made only after final endorsement of the insured mortgage and after the end of a
semiannual or annual fiscal period.
3)
if unauthorized prepayment is accepted, the funds shall be returned to the project
immediately upon discovery.
d. The residual receipts note is nonnegotiable and may not be sold, transferred, assigned, or
pledged by the payee.
e. Presentation, demand and notice of demand, nonpayment and protest of the residual receipts
note are waived.
f. Interest on the note must not compound.
2. Form HUD-92223M, Surplus Cash Note (for all other mortgagor entities; formally called the
Promissory Note). The conditions and limitations are the same as Form HUD-91710M, except
that:
a. Provisions may be made for interest payments annually or semiannually or at the end of a
fiscal period. However, the Note should provide for interest to accrue and be payable in full at
maturity.
b. Prepayment of principal or any payment of interest must be limited to sources other than
Project Income or Project Assets, e.g., syndication proceeds or surplus cash as defined in the
Regulatory Agreement.
c. Payments on promissory notes will be made only as permitted by the applicable Regulatory
Agreement, but prepayment of the promissory notes from sources other than the project is
permitted without HUD approval.
d. Should any unauthorized prepayments be made, as determined by HUD, it shall be the
responsibility of the borrower to return them to the project.
e. Interest on the Note must not be compounded.
H. Tax Credit Equity Bridge Loans. Tax credit equity syndicators or investors (with or without an identity
of interest with the MAP Lender) may make bridge loans to fund required equity contributions for
LIHTC, Historic or New Market Tax Credits during the construction or substantial rehabilitation
period as described in Chapter 14.16.
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I. Identify all subordinate loan funds in Section III “Source of Funds to Meet Cash Requirements” Form
HUD-92264-A.
8.8
Required Application-Processing Exhibits and Lender and HUD
Responsibilities
The lender shall utilize HUD’s standardized application exhibit checklist to facilitate the electronic
submission of the application to aid in HUD’s completeness review of deliverables and to record
underwriting processing results and conclusions for both pre-application and firm applications. The
standardized checklist is a concise structured template organized with separate sections directly related to
each technical discipline. The template will permit the HUD-delegated underwriter and lender to locate
exhibits within the application binder, which will in turn expedite the application review process while
reducing HUD’s risk during the underwriting analysis of the application. These application templates are
for use for all program applications submitted under the Multifamily Accelerated Processing with the
exception of Section 223(a)(7) applications. The lender’s application submission templates for mortgage
insurance are:
1. Underwriter’s Narrative
2. Application Checklist
3. FHA Summary Report (The Wheelbarrow)
A. General Responsibilities of Lender’s Underwriter.
Underwriting multifamily projects is a process for evaluating the character, capacity and
creditworthiness of the sponsor, borrower and its principals, the general contractor, and in the
instance of an identity of interest, the property management company, in order to reach specific
conclusions resulting in the approval (with conditions, as appropriate) or denial of a mortgage
insurance application.
The Lender must assess the borrower’s ability to manage all of the responsibilities of the ongoing
operations of multifamily properties, including the development, construction, completion, and
lease-up for new construction proposals and property maintenance, tenant relations, financial and
performance reporting and effective management for existing properties.
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The lender’s underwriter must:
1. Identify the borrower and its principal entities or individuals and present a complete, consistent
and coherent picture of the financial capacity and creditworthiness of the borrower and the
various principals.
2. Analyze the creditworthiness of the sponsor(s), the borrower entity, if formed, and its principals
and/ or individuals and the contractor. If a borrowing entity is not yet formed at the time the
firm application is submitted, the MAP Underwriter must still perform the financial and credit
analysis on the principals and/or individuals. The underwriter must demonstrate that the
principals and/or individuals have the character, capability, creditworthiness and commitment to
provide expert leadership, working capital and cash needed to close the proposed transaction(s),
complete the development process, as applicable, and to support the operations of the property.
This determination is made in light of the obligations that may already be required of the
principal due to ownership of other business interests and real estate projects.
3. For existing mortgagor entities and properties, evaluate the financial performance of the
mortgagor and the property based on its financial statements and other operating reports, (e.g.,
rent rolls) and credit history to determine eligibility, mortgage amount and conformance to
program requirements.
4. Conduct a mortgage credit review to include:
a. The balance sheets for principals as discussed in Appendix 8B, “How to Analyze Financial
Statements” and in addition to the Schedule of Real Estate Owned and other relevant
schedules.
In each case the lender will conduct sufficient diligence to determine what should be an
appropriate period of past financial review. Character is best demonstrated during periods of
economic distress and so a review of at least one complete business cycle (means the entity’s
fiscal year) is necessary. Any material credit problems in the last 2 to 5 years should be
carefully reviewed and may result in an application rejection. Events that occurred before
that period if, for example more than 8 or 10 years have passed, would not have as material
an impact on creditworthiness but may still be relevant. The lender should consider all
relevant factors in the analysis and credit approval decision.
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b. Determine whether the sponsor(s) has (or will have, given proposed transactions) existing
insured mortgage balances exceeding $250,000,000. If a sponsor has obtained prior approval
to exceed this amount, submit a copy of the Prior Approval Decision together with any other
documents identified as required by the Prior Approval Decision. (See Appendix 8C for prior
credit approval instruction.).
5. Determine if there is incomplete or inconsistent information, or discrepancies between the
information included on the financial statements and in the credit reports. Any inconsistencies
must be reconciled.
6. In addition to the formal documents and credit investigation described above, the lender’s
underwriter must conduct and describe the results of an internet search of each principal and
determine if there is any information that raises concerns about credit worthiness and address
any negative information.
7. Provide the Office of Foreign Assets Control (OFAC)/Terrorism checks and verifications on
principals which are required by the U.S. Patriot Act. These checks must be completed and
documented no later than the time of Initial Endorsement, whether or not the lender is a
regulated financial institution. The OFAC verification is not part of MF Regional/Satellite
Office review except to the extent that the lender has identified problems during the OFAC
check. OFAC requirements are administered by the Department of the Treasury and lenders
should refer to the Treasury’s website http://www.ustreas.gov/offices/enforcement/ofac, for any
questions.
B.
Additional Exhibits Required of Project Participants.
The borrower shall provide the following exhibits for the following participants:
1. Exhibits required for participating professionals, officers of corporations:
a. Identity of Interest of Borrowers Using BSPRA - General contractors with an identity of
interest with the borrower may be either independent businesses with an ownership interest
created in the borrower entity primarily to obtain the Builders and Sponsors Profit and Risk
Allowance (BSPRA) or businesses owned and operated by a Principal of the Borrower.
Notwithstanding any identity of interest, the general contractor is required to provide the
identical exhibits as a participant.
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b. Management Agent - A detailed resume is required for management agents even when they
have no ownership interest in the Borrower or identity of interest with a Principal. Credit
reports should be required of management agents to evaluate the agent’s business practices
and timely payment of accounts. Analysis of financial statement is generally not required,
unless the agent has an identity-of-interest with a Principal, or where financial statements are
necessary to evaluate the capacity of the management entity to perform its management role.
c. Fee Developer/Consultant - Fee developers, packagers, consultants and other professional
persons or organizations are sometimes retained to assist nonprofit Sponsors that might lack
needed experience. Such services might include assisting with project development,
financial structuring or HUD processing. Packagers and consultants must provide resumes
evidencing their qualifications, and the developer must provide credit reports and financial
statements when their services are critical to project viability.
d. Design Architect/Engineers - Design professionals must provide resumes establishing their
credentials, competence and experience commensurate with levels of expertise and
experience required by the project. Absent an ownership interest in the Borrower that would
otherwise qualify the design professional as a Principal, no other mortgage credit exhibits are
required.
e. Executive Officers of Borrower - Officers with less than 10% of the voting stock of a forprofit corporation but who qualify as a principal of the Borrower, may be required to submit
resumes and demonstrate appropriate competence and experience to provide an accurate
picture of character, capacity and commitment.
f. Executive Officers and Directors of Publicly Traded Corporations - are not required to
submit mortgage credit exhibits as individuals, notwithstanding their stock ownership
inasmuch as such firms are regulated by the U.S. Securities and Exchange Commission
(SEC). The SEC-required annual corporate report (Form 10-K) and quarterly corporate
report (10-Q) provide complete financial statements, background and history of corporate
operations as well as resumes and compensation of corporate officers and disclosure of
conflicts of interest of officers and directors. In addition, the credit of publicly traded
corporations is rated by agencies such as Standard and Poor’s, Fitch and Moody’s. When a
publicly traded corporation is a Principal, Forms 10-K and 10-Q and agency credit ratings
may be accepted in lieu of mortgage credit exhibits.
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C. Evaluating Nonprofit Sponsors and Borrowers
1. General.
Nonprofit Borrower/Sponsors (whether national, regional, or local) must have the experience and
financial strength appropriate for the development and ownership of the proposed property.
(Appendix 8D sets forth the evaluation of the nonprofit.) The nonprofit sponsor being evaluated
may not have equal strength with respect to all criteria.
In transactions where the
Borrower/Sponsor’s ownership structure contains multiple entities performing differing functions,
the lender must evaluate the nonprofit and each of the other entities on their capacity to perform its
particular function, e.g. ownership, property management, acquisition, development, resident
services or asset management. This includes the need for prior acceptable history of successful
development, ownership and management of assets similar in size and complexity as the proposed
project. Therefore, only the criteria for the areas in which the nonprofit entity has direct
responsibility or authority need to be applied during the evaluation process. The eligibility of
prospective nonprofit Sponsor/Borrower must be determined before a Pre-application approval or
Firm Commitment is issued.
The lender must include in the Underwriter Narrative summary a description of the party(s) paying
pre-development costs, in addition to the follow written explanations:
a. Details of any proposed rent/income restrictions on the property to be developed by the
nonprofit.
b. Developer’s Agreement or any other document which shows the relationship and work
responsibilities of all parties associated with the transaction.
c. Explanation of the terms and conditions of the Housing Consultant’s contract, if applicable.
The fee for the Housing Consultant shall be an expense of the borrower.
d. Memorandum of findings and recommendations:
1. Must include a description of the relationship between the nonprofit and any profit
motivated entities involved in the transaction.
2. The determination of eligibility or ineligibility of the nonprofit sponsor/borrower must be
approved by the HUD office with jurisdiction.
e. Explain any nonperforming assets in nonprofit borrower/sponsor portfolio in conjunction
with the REO review.
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f. Detailed explanation of the motivation for sponsoring the project including a history of the
organization's involvement in multifamily housing.
g. The management agent must have a minimum of 3 years of experience in managing at least 5
properties comparable to the proposed property in scale, complexity and regulatory
compliance requirements. A property manager must demonstrate adequate property
management experience with properties comparable to the subject property.
h. Signed written resolution of the nonprofit’s directors or trustees, acknowledging the
responsibilities and obligations of sponsorship and continuing ownership, and that the subject
proposal reflects the will of the board and/or the membership of the organization.
i. Detailed statement of arrangements made or proposed for the following (listing principals
involved, their relationship with the nonprofit sponsor/borrower, the terms of the
arrangements and the circumstances surrounding each):
1. Land on which the project will be built.
2. Project construction, including selection of general contractor, subcontractors and
architect.
3. Legal and consulting services.
4. Project financing, including any discounts.
NOTE: A national, State or regional organization acting as a cosponsor must submit a
separate Form HUD-3433 and Supplemental documentation.
j. The nonprofit sponsor must have diverse and stable funding sources with recurring revenue
and, if required, a proven record of raising sufficient funds to meet its operating needs. The
lender must identify whether the nonprofit sponsor’s primary funding sources are from fees
on development projects or from sources such as public funding, public contracts, grants or
donations that may be subject to budget or funding constraints.
D. Mortgage Credit of the Nonprofit Sponsor and Borrower.
1. The underwriter narrative should summarize the review of Form HUD-3433 to determine if the
nonprofit sponsor/borrower is qualified to start, complete and operate a project under the insured
loan programs. The lender must determine that the nonprofit sponsor/borrower is acting on its
own behalf, or if either knowingly or unwittingly acting under the influence, control or direction
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of any outside party seeking to derive a profit or gain from the proposed project—such as a
landowner, real estate broker, contractor, architect, attorney or consultant.
2. Credit investigation analysis.
a. As with for-profit sponsors, the lender’s underwriter must make a determination of the
individuals and entities with decision-making and operational authority over the project. The
underwriter will provide an in-depth written analysis on the aspects of the mortgage credit
review in the underwriter’s narrative.
b. Check that the borrower/sponsor has no unresolved issues related to payment history and check
credit references.
3. Financial data analysis.
a. Determine the amount of cash and liquid assets available for investment in the project and
overall financial condition of the sponsoring group, and in particular whether the financial
statements indicate that income will be sufficient to meet the expenses incurred by the group.
b. Financial statements of many large nonprofit organizations show various fund accounts, such
as general and building fund, etc.
1) Identify any inter-fund receivables and payables that cancel each other.
2) Do not consider restricted-use funds in the analysis.
3) Review the Public Records section of the credit report to eliminate assets, which were used
as collateral in secured borrowing.
c. The project size and complexity should be consistent with the abilities of the sponsoring
organization.
E. Submitting Form HUD-3434, Certificate of Relationships and Non-profit Motives, and 3435,
Certification of Contractual Relationship.
1. At the Firm Application stage and prior to initial endorsement (beginning of construction in the
case of insurance upon completion), the sponsor and borrower must certify on Form HUD-3434,
their relationships with parties or firms furnishing land and services.
2. Such parties or firms must certify on Form HUD-3435 their relationship with the sponsor and
borrower.
3. If there is a change in the certified relationship, the sponsor, borrower and other parties must
furnish additional certifications with respect to each change.
4. All relationships are subject to HUD approval.
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F. Nonprofits may earn a non-profit developer fee, but not BSPRA, on a new construction or substantial
rehabilitation proposal under Sections 220, 221(d)(4), 231, or 241(a).
G. Nonprofit Borrowers may include a consultant fee as part of the replacement cost to be paid from the
Organizational line item. The selection of a housing consultant is the responsibility of the
Sponsor/Owner who will execute a consultant contract or agreement that engages the consultant to
assist the Sponsor/Owner in the development process. The MAP Lender will review and explain the
terms of the housing consultant contract in the Underwriter’s Narrative, but does not approve the
contract nor determine compensation limits. The resume(s) are to be submitted with the FHA loan
application. HUD will permit a consultant fee under the following conditions:
1. As currently permitted, as part of the developer fee where one exists;
2. Where a developer’s fee is not permitted in the loan, including those loans that use a BSPRA, a
consultant fee may be paid from the Organizational line item in Section G on Form HUD-92264;
3. Use of a consultant fee is limited to nonprofit sponsored projects that have retained a consultant to
assist in the origination, development, financial services (non-tax credit deals) and/or loan
processing of the project. The agreement between the Nonprofit Borrower and consultant shall
outline the services to be provided and fee amount;
4. The fee amount shall be based upon complexity of the transaction but limited to the greater of
$40,000 or 10 percent of the estimated total for all improvements, total carrying charges and total
legal, organizational and audit fees; and
5. No more than 50% of the consultant fee shall be paid at initial endorsement, with the remainder to
be paid during the construction period and final endorsement as described in the consultant
contract.
H. Nonprofit Sponsor and a Profit-Motivated Borrower Entity.
A nonprofit sponsor may establish a profit-motivated borrower entity for the purpose of owning a tax
credit project or obtaining BSPRA and distributions from surplus cash. Such a request may be
approved provided:
1. The Borrower’s legal counsel’s opinion determines that there is no legal impediment that would
prohibit approval of this relationship structure.
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2. The nonprofit agrees to be regulated by the terms and conditions of the regulatory agreement
(Form HUD-92466M, Regulatory Agreement Multifamily Housing Projects) applicable to a profitmotivated entity.
3. The nonprofit is subject to the mortgage limitations applicable to a profit-motivated entity.
4. A working capital deposit is required.
5. A nonprofit developer’s fee is not included in the mortgage; the nonprofit can include BSPRA.
6. If the nonprofit provides evidence that it has obtained exemption from real estate taxes, the tax
exemption must run with the real estate and not with the type of sponsorship.
7. The Borrower’s legal counsel’s opinion addresses any potential tax consequences, and determines
there will be no change in the nonprofit’s Section 501(c)(3) tax-exempt status with IRS.
8. Form HUD-3433 is not required in these types of applications.
I. Lender’s Review and Recommendation
The lender’s underwriter’s recommendation, after review of all processing materials and third party
reports, is made in a separately bound report addressed to HUD included in the underwriter’s
narrative.
1. The report must detail the project’s financial requirements and the credit capacity of the sponsors,
borrower entity, its principals and the general contractor. The lender’s underwriter’s narrative
must detail the project’s financial feasibility with an analysis of the primary risks, any mitigating
factors, and the rationale for any waivers requested. The mortgage credit analysis must contain
evidence of the financial feasibility and acceptability of the single asset entity, of each principal
with decision making control and of investors providing funds for initial closing. Include, at a
minimum, the:
a. Name of the borrower entity.
b. Composition of the borrower entity, include the tiers showing principals with control and
providing the financing.
c. Name of the general contractor, disclosing any relationship(s) with the borrower entity.
d. Mortgage amount and controlling criterion.
e. Financial requirements for closing.
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Required Application-Processing Exhibits and
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f. Sources of funds to meet cash requirements, including all sources and disclosing how the
money will be used.
g. Ratio of loan proceeds to actual cost for the purpose of cost certification.
h. The experience level of the development team relative to the proposed project.
i. A credit and financial review of sponsor(s)/borrower and principals and general contractor.
This review must provide an overview of their financial strength, liquidity, experience, and
creditworthiness and address positive and negative findings known by the lender.
j. Completion Assurance requirements.
k. Recommendation to accept or reject the proposed project.
l. If accepted, any conditions to be included in the commitment. (See Chapter 11)
2. Complete Form HUD-92264-A and exhibits for the type of mortgage proposed.
3. The lender must transmit to HUD all borrower submissions and related documents.
The lender will analyze the stability of the principal’s portfolio ownership and management
structure, portfolio characteristics and market conditions and recommend prior approval of
creditworthiness. The analysis shall include:
i.
Review of the stability of ownership and management.
ii.
Evaluation of any problems and challenges confronting the principal and the principal’s
plans for action in response to such challenges including:
iii.
Underperforming properties, (e.g., properties at less than 90% occupancy; properties at
less than 1.1 to 1 debt service coverage; properties with significant physical or
management problems).
Existing defaults and/or pending capital transactions, (e.g., anticipated refinancing or
refunding, pending balloon payments, interest rate resets).
Property or Asset Management deficiencies, (e.g., underfunded reserves, deferred
management fees).
Suits, judgments, liens or related adverse actions.
iv.
v.
vi.
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viii.
8.9
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Chapter 8
Mortgage Credit
Term of Mortgage and Commencement of
Amortization
Document page 273
Weak or unstable markets affecting geographically concentrated properties or other
actual or prospective adverse conditions affecting a unique combination of assets and
the impact of such conditions on the portfolio.
A determination whether the principal’s reputation, past performance and capacity
support a conclusion that insured assets will be maintained in good physical condition,
with timely capital replacements and prompt, effective action to remedy problems.
J. Mortgage Credit Duties of HUD
1. Concentrated Risk Prior Approval - Confirm that the lender has correctly determined if prior
approval is required for the sponsor to file an application. (See Appendix 8C for prior credit
approval instruction).
2. Previous Participation - Perform the electronic 2530 review and approval process.
3. Underwriting Conclusions - Review lender’s preliminary analysis and recommendation about the
Development Team’s financial capacity, experience and creditworthiness and the lender’s analysis
of any defaults, mortgage relief, assignments, and foreclosures relating to these projects.
4. Verify Sources of Funds - HUD will verify, through use of the Form HUD-92264-A and
documents supplied by the lender, the source(s) of funds to meet cash requirements
8.9
Term of Mortgage and Commencement of Amortization
A. Sections 220, 221(d)(4), 241(a) and 231 projects:
1. Term: The term of the mortgage is the lesser of 75% of the estimated remaining economic life of the
physical improvements or 40 years from the date of the first payment to principal. Express the
mortgage term in whole or partial years, with a partial year expressed on months, for example 26
years, 3 months.
2. Amortization starts:
a. For Insurance of Advances projects, amortization begins no later than 4 months (the first day of
the fifth month) after the date of construction completion as estimated in the Firm
Commitment.
b. For Insurance Upon Completion project, the first day of the second month following the date of
Final Endorsement.
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3. Section 241(a) projects:
Term: The Section 241(a) loan should generally be coterminous with the underlying FHA-insured
first mortgage if that loan has more than 25 years remaining on its term.
Amortization: If fewer than 25 years remain on the term of the first mortgage, HUD will consider
an amortization period up to 40 years regardless of the underlying first mortgage’s amortization
period, so long as the term of the insured mortgage is no greater than 75% of the project’s
remaining useful life.
B. Section 207 pursuant to 223(f) projects:
1. The maximum term of the mortgage is 35 years or 75% of the estimated remaining economic life
of the physical improvements, whichever is less, provided that the term may not be less than 10
years.
a. The mortgage term shall be the eligible number of whole or partial years between 10 and 35.
b. Express a partial year in months, for example 26 years, 3 months.
2. Amortization starts on the first day of the second month following the date of the Initial/Final
Endorsement.
C. Section 223(a)(7) projects:
1. Most transactions are processed with a lower interest rate, and re-amortized either within the
remaining term or with an extension of up to 12 years. Exceptions are detailed in chapter 18.
Extended amortizations may reduce risk to the Department by lowering debt service requirements
so long as the cost not attributable evidences the physical condition supports the extended term of
the mortgage. In every case, the loan term cannot exceed 75% of the remaining useful life of the
property.
2. Amortization starts on the first day of the second month following the date of the Initial/Final
Endorsement of the mortgage.
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8.10
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Sections 220, 221(d), 231, 241(a) Firm Commitment Processing:
Determining Mortgage Amounts, Cash Requirements and Related
Items
A. Firm Commitment Processing.
1. New Construction Loan Limits. For new construction, the insurable loan amount is the lowest of
four criteria on Form HUD-92264-A, Supplement to Project Analysis: the application amount, the
cost amount, the statutory limits amount, and the debt service amount, which are described below.
Refer to Appendix 3A for the applicable program’s required maximum loan ratios and the debt
service coverage ratios needed to complete criteria for Firm applications for new construction and
substantial rehabilitation:
a. The Application amount.
b. The Amount Based on Value or Replacement Cost. The result of lender's estimate of the
replacement cost after completion, multiplied by the applicable program percentage.
c. The Amount Based on Limitations Per Family Unit - Statutory Limits.
The Statutory limits are determined by an amount attributable to per unit limitation type as
adjusted by the High Cost Percentage (HCP) and dwelling use (excluding land).
Record the sum of costs not attributable to dwelling use from Section M Line 15, Form HUD92264. Insert the same program percentage loan to cost ratio noted in A.1 above. Multiply the
sum of costs not attributable with the percentage loan to cost ratio and record sum.
Strike through “site not attributable to dwelling use” and insert the warranted price of the land
(from Section G Line 73a, Form HUD-92264) or the “as is” value of the building without the
improvements if the transaction is a substantial rehabilitation loan (from Section H Remarks,
Form HUD-92264). Insert the same program percentage loan-to-cost ratio noted in A.1 above.
Multiply the sum of CNA with the percentage loan-to-cost ratio and record sum.
The total of all costs not attributable multiplied by the percentage loan-to-cost ratio is added to
the maximum statutory limit calculated for the number of units by type. The sum is the
criterion mortgage amount.
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Strike a line through or leave blank the “Total Number of Spaces,” field, this is no longer
applicable.
For the latest High Cost Percentages visit the HUD web site at:
http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/mfinfo .
d. Amount Based on Debt Service Limit. The loan amount supported by the applicable percentage
of the projects’ estimated net income. The NOI used to support this mortgage criterion may be
split into two or more income streams, for example to capitalize the savings from tax abatement
or to recognize other revenue sources such as from an IRP decoupling or the difference between
market rents and HAP contract rents.
1)
2)
That portion of the maximum mortgage supported by the tax abatement or other source
must be amortized over the same period as the additional NOI is available.
In order to be recognized in the mortgage proceeds, any tax abatement must run with the
real estate and not with the type of sponsorship.
2. Substantial Rehabilitation Loan Limits. Amount of Loan. Rehabilitation under Section 220 and
221(d). (This includes only projects involving substantial rehabilitation.) The insurable loan
amount is the lowest of four criteria on Form HUD-92264-A, Supplement to Project Analysis: the
application amount, the cost amount, the statutory limits amount or the debt service amount, as
described below. Refer to Chapter 3 for the applicable program required maximum loan ratios and
the debt service coverage ratios needed to complete the criteria for substantial rehabilitation Firm
Commitment applications.
a. The Application amount.
b. The lender’s estimate of the rehabilitation cost plus the ”as is” value of the land and existing
improvements before rehabilitation, multiplied by the applicable percentages in Chapter 3.
c. Amount of Loan – Rehabilitation under Section 231. (Only for projects involving substantial
rehabilitation.) The amount as permitted under the new construction program except the loan
limitation is based on the estimate of value rather than the replacement cost. The insurable
amount is the lowest of:
1)
The application amount;
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Sections 223(a)(7) and 223(f) Firm
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Property owned – 100% of the estimated cost of rehabilitation plus the lesser of:
(a)
(b)
Principal amount of existing indebtedness against the property and closing charges,
or
For all borrowers, apply the amounts in Chapter 3, to calculate the lender’s
estimated appraised value of the property before rehabilitation and closing charges
less:
(i)
(ii)
Value of leased fee, if leasehold, and/or
Principal amount of special assessment
3) Property to be acquired – For all borrowers apply the amounts in Chapter 3 to calculate
the lender’s estimated current cost of rehabilitation/reconstruction plus the lesser of:
(a)
Apply the amounts in Chapter 3 for all borrowers to calculate the actual purchase
price of the property and closing charges, or
(b)
For-profit borrowers, apply the amounts in Chapter 3, of the lender’s estimated
appraised value of the property before rehabilitation and closing charges and/or
principal amount of special assessment.
B. Insurance of Advances and Related Matters. See Section 12.7 and Appendix 12 for processing
instructions.
8.11
Sections 223(a)(7) and 223(f) Firm Commitment Processing:
Determining Mortgage Amounts, Cash Requirements and Related
Matters
A. Firm Commitment Processing for Section 207 pursuant to 223(f):
1. Amount of loan in a purchase transaction.
In a purchase transaction involving an arm’s length sale, the mortgage may not exceed the lowest
of 5 criteria on Form HUD-92264-A, Supplement to Project Analysis: the application amount, the
loan to value amount, the statutory limits amount, the debt service amount, and the cost amount,
which are described below. Refer to Chapter 3 for the applicable maximum loan ratios and the
debt service coverage ratios needed to complete criteria for a Firm application for a purchase
transaction.
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a. Application amount.
b. Loan-to-Value Ratio amount. Refer to Chapter 3 for ratios. These loan-to-values apply to
both for-profit and nonprofit borrowers. (The amount based on value for Section 202 or 202/8
Direct Loan purchase transactions is 90%.).
c. Statutory Limits Amount. This limit is based on maximum costs. The maximum per family
unit limitation for refinance under Section 207 may be increased by the percentage of the HCP
plus the percentage loan ratio noted in A.1.b, above. Follow the same guidance for in Section
8.10.A.1.c.
NOTE: Per family unit limits may be increased by the High Cost Percentages. The per-unit
limits and HCP may be obtained on the HUD web site at:
http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/hicost/hicost.
d. Debt Service Amount. Debt service is the loan amount supported by the applicable percentage
of the project’s estimated net operating income (NOI). The mortgage may exceed this limit by
capitalizing the savings from any tax abatement. In such cases, the net earnings estimate will
not reflect that temporary tax abatement.
The NOI used to support this mortgage criterion may be split into two or more income streams to
capitalize the savings from tax abatement or to recognize other revenue sources such as from an
IRP decoupling or the difference between market rents and HAP contract rents.
1) That portion of the maximum mortgage supported by the tax abatement or other source of
revenue must be amortized over the same period as the additional NOI is available.
2) Any tax abatement must run with the real estate and not with the type of sponsorship if it
will be recognized in the mortgage proceeds.
e. Acquisition Cost. The applicable percentage from Appendix 3B must be applied to the
Borrower’s acquisition cost. Acquisition cost is defined as the sum of the items:
1) Purchase price shown in the purchase agreement and determined allowable by the lender.
2) The lender’s estimate of repair cost, if any, provided such costs are paid by the Borrower
and are not included in the purchase price.
3) The sum of reasonable financing charges, legal, organizational, and title and recording
expenses paid by the Borrower.
4) Eligible discounts paid by the Borrower at property acquisition.
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NOTE: Any fees, discounts or other amounts paid by the seller for or on behalf of the
purchaser must be reflected as a reduction to the acquisition cost.
5) Eligible architect's fees, mechanical engineering fees, municipal inspection fees, HUD
inspection fees, if applicable, and other fees as may be determined eligible by the lender
including the cost of lender third party reports.
2. Amount of Loan in a Refinancing Transaction.
The subject loan will be the lesser of a or b:
a. Amounts in Section 8.11.A.1 above, except e.
b. Cost to Refinance. An amount that equals the greater of the following:
1) 80% of the lender's estimate of the value of the project, or
2) The cost to refinance the project, which is defined as the sum of:
i. The amount needed to pay off the existing indebtedness as determined eligible by the
lender.
ii. The initial deposit to the Reserve for Replacements.
iii. The sum of reasonable financing charges, legal and organizational, and title and
recording expenses paid by the Borrower.
iv. The lender’s estimate of repair cost, if any.
v. Eligible discounts paid by the Borrower.
vi. Eligible architect's fees, mechanical engineering fees, municipal inspection fees, HUD
inspection fees, if applicable, and other fees as may be determined eligible by the
lender including the cost of lender third party reports.
vii. Less the amount of any Reserve escrow for replacement and/or major movable
equipment that will be purchased as an asset of the project.
c. Release of Cash-Out / Equity from Loan Proceeds.
The maximum loan-to-value ratio for cash-out refinances is 80%. Fifty percent (50%) of any
cash out proceeds after funding mortgageable transaction costs and the assurance of
completion requirements must be held in an escrow by the lender until the required non-critical
repairs are completed and HUD approves the release. Waivers to allow holding back a lesser
percentage of cash out proceeds will only be considered when the holdback is greater than both
$1,000,000 and the assurance of completion escrow (20% of repair costs). The owner must
have demonstrated the ability to complete repairs in a timely manner, and a commitment to
keeping the property in good repair with no deferred maintenance.
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B. Identity of Interest Purchase Transaction.
Refer to Section 13.16.
C. Determining Existing Indebtedness in a Refinancing Transaction.
Existing indebtedness in a refinancing transaction is defined as:
1. Outstanding mortgage(s) incurred in connection with the construction or acquisition of the project
or with capital improvements made to the property, as confirmed by the current mortgagee. Use
the pay-off letter located in Appendix 8E of this Guide.
2. Other recorded indebtedness such as mechanic's liens and tax liens, provided they did not result
from personal obligations of the Borrower.
3. Unrecorded debt directly connected with the project supported by documentation from the
Borrower. For such debt to be recognized, the Borrower must provide the lender with
documentation that unquestionably identifies the indebtedness with the project and is not the result
of unpaid operational expenses such as delinquent interest, accounts payable or deferred
management fee. Examples are:
a. Prepayment penalties on the mortgage.
b. Indebtedness incurred in making significant betterments to the property.
NOTE: Program penalties arising from the defeasance of tax-exempt and taxable bonds and
greater than 10% of the proposed FHA insured loan amount cannot be recognized. Similarly, the
costs of settling prepayment penalties or yield maintenance fees associated with swaps or other
derivatives (e.g., swap breakage fees) greater than 10% of the proposed FHA insured loan amount
are not eligible to be included in the calculation of existing indebtedness. Prepayment penalty,
defeasance costs and/or the costs associated with prepayment of derivative instruments which are
greater than 10% of the proposed FHA insured loan amount may be paid only from equity out (i.e.
the loan amount is 80% LTV or less on a Section 223(f) refinancing).
4. Mezzanine Debt. Mezzanine debt may be considered in the eligible basis for refinancing only
where there is no identity of interest between the principals and the Mezzanine lender or any
affiliates of either party, or in cases where the funds were used to fund capital improvements.
5. Do not recognize indebtedness:
a. Recently placed against the project to increase the mortgage or circumvent program intent.
NOTE: “Recent indebtedness” for multifamily properties is defined as any debt incurred up to
1 year before the submission of an application for mortgage. Recent indebtedness can be
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Document page 281
recognized only if it was used for a non-identity of interest acquisition, for construction, for
capital improvements to an existing project. Bridge loans to retire maturing debt used for such
purposes are acceptable. The Borrower must provide sufficient documentation that supports
recent indebtedness.
b. Created by wrap mortgages:
1) The Borrower and lender must give a detailed explanation of the purpose of the wrap and a
documented accounting of the use and disbursement of the loan proceeds.
2) The lender may recognize loan proceeds used for capital improvements or project
operations.
D. Reserve for Replacements.
The cost of an initial deposit to the Reserve for Replacements is eligible for inclusion in the maximum
insurable mortgage.
1. Purchase Transaction.
a. The purchase agreement must specify:
1) Whether or not the transfer includes the Reserve for Replacements or other escrows as an
asset of the project.
2) Dollar amounts of escrow and/or items which the seller will pay on behalf of the Borrower,
e.g., the operating deficit, discounts, initial deposit to the Reserve for Replacements.
b. Apply existing Reserve funds transferred as an asset of the project as a reduction of acquisition
cost when computing Criterion 7 on Form HUD 92264-A.
2. Refinancing Transaction.
a. The Borrower must submit a list of escrows currently on deposit for the project:
b. The escrow account and Initial Deposit to the Reserve for Replacements must remain with the
project.
c. Apply funds currently on deposit in a Reserve for Replacements as a reduction of the cost of
refinancing under criterion 10 on Form HUD 92264-A, unless the existing Reserves will fund
the new loan’s IDRR.
E. Discounts and/or Costs of Issuance associated with bond financing may be eligible for inclusion in the
computation of Criteria 7 and 10. See Chapter 3 for further details.
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Firm Commitment Processing with Grants and
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Document page 282
Firm Commitment Processing with Grants and Loans
A. In General.
These instructions apply to:
1. Grants and loans to the Borrower or its Principals from a federal, state or local government agency
or instrumentality.
2. Grants and loans to the borrower or its Principals from national, regional and local community
service organizations (nongovernmental source) or foundations.
3. Refer to Chapter 14 for guidance on LIHTC, Historic Tax Credit and New Markets Tax Credit
equity syndication proceeds.
B. Application for Mortgage Insurance.
1. At the Firm Commitment processing stage, the applicant must:
a. Identify the use of grant/loan funds on Form HUD-92013, Application for Project Mortgage
Insurance.
b. Submit: A commitment letter signed by an authorized agent of the governmental agency or
instrumentality or the non-government source identifying:
(a) Amount of grant/loan funds including all repayment terms and conditions and any
regulatory restrictions that affect the operation of the property.
(b) Intended use of the grant/loan funds.
(c) Any conditions to the grant/loan and any reasons the commitment letter could be
withdrawn.
(d) That the grant/loan is not subject to a future appropriation or funding availability that is not
currently in the hands of and available for disbursement by the governmental agency or
instrumentality or the non-government source.
2. Any type of grant/loan not disclosed by the Borrower may result in a rejected application or the
issued Firm Commitment made null and void.
C. Grants/Loans from governmental agency or instrumentality.
1. Firm Commitment. HUD will review the proposed grant/loan structure, terms and conditions and
the draft grant/loan documents during Firm Commitment processing or earlier, as needed. HUD
will consider waivers with reasonable terms in order to facilitate coordination between FHA
requirements and those of the governmental agencies.
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2. Initial Endorsement
a. Before scheduling the closing, Field Counsel must review the grant/loan documents to assure
their legal sufficiency.
b. The MAP Lender must consent in writing to the placing of the subordinate mortgage and agree
that its existence could not create a basis for default on the first mortgage.
c. The governmental secondary financing lender must enter into the HUD prescribed form of
Subordination Agreement.
d. The Borrower may use, instead of that portion of the front money escrow provided by the
grant/loan, either:
1) An unconditional irrevocable letter of credit issued by a banking institution with a rating
acceptable to HUD and for a term acceptable to HUD; or
2) An agreement entered into by HUD, the governmental agency or instrumentality, the MAP
Lender and the Borrower, which provides the following:
(a)
HUD has:
i. The right to approve construction advances after considering any reported
noncompliance by the agency or instrumentality if the project is proceeding in
compliance with approved plans and specifications.
ii.
A joint review and agreement between the MAP Lender, HUD and the
governmental agency of construction progress schedules and allocation of draws.
iii. Sole authority to resolve differences in the inspection process and the process of
disbursing grant/loan proceeds.
(b)
The MAP Lender will furnish both HUD and the governmental agency with copies of
the approved interim advances Form HUD-92448, Contractor’s Requisition, Form
HUD-92403, Application for Insurance of Advances of Mortgage Proceeds, and
supporting documentation.
(c)
The governmental agency or instrumentality must process the advance from its grant
or loan funding promptly and without adjustment. HUD or the MAP Lender will:
(i) Send the governmental agency a copy of the approved requisition for its
records.
(ii) The governmental agency must notify HUD and the lender of a need to make an
adjustment the following month.
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(d)
The governmental agency assumes the risk for any grant/loan funds disbursed in excess
of the amount approved by HUD or the lender and agrees to replenish the excess funds
within 10 working days of notification by HUD or the lender.
(e)
If a default occurs before completion of construction, the governmental agency must
disburse the remaining grant/loan funds so long as the request for funds remains in
the same ratio as previously authorized.
(f)
The governmental agency’s attorney must render an opinion that the agreement and
grant/loan commitment is legally binding on present and all future administrations.
3. Grant/loan proceeds must be advanced either:
1) Before the insured mortgage proceeds, or
2) Concurrently and on a pro rata basis with the disbursement of the insured mortgage proceeds.
NOTE: If the grant/loan proceeds are not available at initial endorsement, HUD may
either:
(a) Proceed to initial endorsement, but not disburse any insured mortgage proceeds until
the grant/loan is in place and the funds are available for disbursement, or
(b) Have the Borrower/Sponsor fund an escrow equal to the grant/loan. Advances from
this escrow must follow outstanding instructions for the disbursement of the grant/loan.
3) Release of grant/loan proceeds cannot be conditioned on the completion of specific project
improvements.
4. See Appendix 12A for front money requirements and disbursement of mortgage proceeds on
LIHTC projects.
D. Grants/Loans from a non-governmental source.
1. Commitment Processing.
a. The last 3 years of audited financial statements, if available, must be submitted evidencing that
the providing source has the financial capacity to meet its funding commitment.
b. If audited financial statements are not available, unaudited statements meeting the
requirements of Section 8.4.C must be provided.
2. Initial Endorsement.
a. Before scheduling the closing, HUD must review the grant/loan documents to assure the legal
sufficiency of the documents.
b. The grant/loan funds must be disbursed before insured mortgage proceeds.
c. Release of grant/loan proceeds cannot be conditioned on the completion of specific project
improvements.
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3. All work performed with the grant/loan proceeds:
a. Must be cost certified.
b. Must conform to Davis-Bacon requirements including submission of payrolls, certifications,
etc., if payment of Davis-Bacon wage rates is required by the grant/loan program.
8.13
Insurance Upon Completion
Insurance Upon Completion (IUC) is an option for new construction and substantial rehabilitation projects
financed under Sections 220, 221(d)(4), and 231. Mortgage insurance is provided after project completion
and issuance of Certificates of Occupancy for all units. The following instructions apply to IUC projects:
A. A financial and credit investigation is required on the Borrower, its Principals and any identity of
interest general contractor.
B. MIP is not included in Form HUD-92264 nor is it charged until the project reaches endorsement.
C. Working Capital and Operating Deficit Escrows. Projects that apply under IUC must meet the
operating deficit escrow and working capital requirements as outlined in Section 8.14 below, except
for the extra 2% construction contingency portion of the working capital, which is not required.
D. Assurance of Completion is not applicable to IUC projects. However, at endorsement, the general
contractor must address latent defects by completion of the Latent Defects Escrow, Form HUD92414M, which requires an escrow of 2½% of the total amount of the Construction Contract in the
form of a surety bond, cash escrow or an irrevocable letter of credit issued by a banking institution.
E. Breakdown of Financing Charges: In IUC projects, before issuance of the Firm Commitment.
1. The mortgagee must provide:
a. A breakdown of financing charges and discounts by submitting Form HUD-92455M, Request for
Endorsement of Credit Instrument, Certificate of Mortgagee, Borrower and General Contractor,
with the Certificate of Mortgagee portion completed. The balance of the Form is to be completed
before Final Endorsement in lieu of Form HUD-92023M.
b. Information relative to the construction and permanent interest rates and mortgage term.
2. Each item is reviewed to ensure its reasonableness in relation to comparable projects and market
conditions.
3. HUD will inform the borrower of the fees that are recognizable for cost certification.
F. Building Loan Agreement, Form HUD-92441M, is not applicable to IUC projects.
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Determining the Estimated Cash Requirements for Completing
the Project
The MAP Lender has the obligation to collect and hold all funds, escrows, and deposits (initial draw,
mortgage proceeds) specified for the transaction; this includes all other funds held by or at the order of the
lender in connection with the loan transaction. All funds are held by the lender or a depository institution
satisfactory to the lender, and must be pursuant to any applicable escrow agreement(s).
The MAP Lender must evaluate the Borrower’s and its Principals’ financial strength and creditworthiness,
including their ability to meet the financial requirements for completing a project. The lender’s
underwriter is responsible for completing the Form HUD-92264-A and the electronic wheelbarrow to
present their analysis of cash requirement to close the transaction.
To calculate the financial requirements, the lender must total the following:
A. Total estimated development cost, including the amount by which the:
1. Contractor’s and/or Borrower’s estimate for construction exceeds lender’s estimate;
2. Owner/Architect Agreement for design and/or supervisory services exceeds lender’s estimate; or
3. Consultant’s contract for services exceeds lenders estimate.
B. Amount necessary to clear all debts on the land (or property if substantial rehabilitation). The lender
must verify all indebtedness that must be paid off at endorsement. In purchase transactions, include
other costs associated with the acquisition that will not be recoverable form mortgage proceeds, such
as zoning expenses.
C. Estimated cost of offsite improvements and demolition.
D. Cost of equipping and furnishing a project with non-realty items, if applicable. Use the higher of
lender’s estimate or the Borrower’s estimate.
E. Working capital deposit, if required.
1. The working capital escrow requirement for new construction transactions will be 4% of the
mortgage amount, half of which will be a construction contingency for cost overruns and approved
change orders. Separate provisions within the working capital escrow will govern the remaining
2% construction contingency. The construction contingency portion of the escrow will be
refunded to the developer at Final Endorsement if not used. Construction funded from the
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contingency portion of the working capital escrow may be considered as the basis for a request for
an increased mortgage amount.
2. Working capital funds are not mortgageable and the unused portion may be released to the
Borrower. See Chapter 12 Section 12.15 for release of escrow.
3. For LIHTC projects with a funded working capital reserve held by the partnership (even though
controlled by the syndicator or investor and not by HUD or the lender), the funded reserve will be
credited towards the increased construction reserve requirement, although the lender-controlled
account must still meet the 2% working capital escrow requirement.
4. The working capital escrow requirement for substantial rehabilitation projects is 2% of the
mortgage amount.
5. Use Form HUD-92412-M, Escrow Agreement for Working Capital. The lender will deposit said
funds in an account insured or guaranteed by a federal agency. See Handbooks 4350.4, Insured
Multifamily Mortgagee Servicing and Regional Office Director/PC for the depository
requirements.
F. Operating deficit escrow.
1. For all new construction and for substantial rehabilitation projects in which there will be
significant resident displacement resulting in negative cash flow during the rehabilitation period,
the operating deficit escrow will be the greater of:
a. What the appraisal and underwriting analysis determines to be appropriate; or
b. 3% of the mortgage amount; or
c. 4 months debt service (Principal & Interest and Mortgage Insurance Premium) if the property
is a garden apartment, or 6 months debt service (Principal & Interest and Mortgage Insurance
Premium) if the property is an elevator building where a single Certificate of Occupancy will
be issued before any of the units or any of the entire floors can be rented.
2. HUD will consider lender requests for operating deficit escrow draws during lease-up based on the
adequacy of the remaining amount of operating deficit escrow on deposit with the project. See
Section 12.15.E for further mitigation and release guidance.
3. The amount of the operating deficit escrow for substantial rehabilitation projects with at least 90%
Project-Based Rental Assistance shall be based only upon the conclusions of the appraisal and
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underwriting analysis and need not be the higher of 3% of the mortgage amount or 4 months of
debt service. The underwriting presentation should provide a detailed estimate of the projected
cash flow through the period of the rehabilitation to support the lower escrow amount.
4. For LIHTC projects with a funded operating deficit reserve held by the partnership (even if
controlled by the investor and not by HUD or the lender), the funded reserve will be credited
towards the increased reserve requirements of 3% of the mortgage amount or 4 months of debt
service, although the lender-controlled account must still meet what the appraisal and underwriting
analysis determines to be an appropriate operating deficit amount.
5. Use Form HUD-92489a-M, Escrow Agreement for Operating Deficit. The lender will deposit said
funds in an account insured or guaranteed by a federal agency. See Handbook 4350.4, Insured
Multifamily Mortgagee Servicing and Regional/Satellite Office for the depository requirements.
G. Commitment, marketing fees, and discounts must be paid out-of-pocket by the Sponsor/Borrower and
may not be paid from the operating deficit escrow.
H. For tax-exempt or taxable bond financing, cost of issuance must be paid out-of-pocket by the
sponsor/borrower and may not be paid from the operating deficit escrow.
I. Relocation payments not included in lender’s estimated replacement cost on Form HUD-92264-A may
be paid from the operating deficit escrow.
J. The lender must deduct from the estimated replacement cost the maximum insurable mortgage, any grant/
loan funds or tax credit equity attributable to replacement cost items, and fees not to be paid in cash. The
remainder is the estimated financial requirements needed to complete the project. These calculations
should be recorded on Form HUD-92264-A
K. Cash-Out Escrow from Land Equity.
If land, or the “as is” property value for a substantial rehabilitation project, is contributed to meet the
Borrower’s equity requirement, any cash-out from the excess land or property equity above what is
required at initial endorsement must be deferred until the project is complete and has demonstrated to
the satisfaction of the Regional Office that it has achieved 6 consecutive months of break-even
occupancy or 12 months break-even occupancy for transactions meeting Large Loan parameters. At
initial endorsement the lender will establish an escrow, and the balance thereof can be released to the
Borrower after the deferral period. This does not prevent the Borrower from applying land value
equity to fund the operating deficit or working capital escrows, or other cash requirements at initial
endorsement. To the extent that there are excess mortgage proceeds available from the land value (or
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“as is value”) or other equity, and after capitalizing the required escrows etc., any remaining balance
of excess mortgage proceeds may also be used for all the purposes described in Appendix 12A,
paragraph D. This includes funding the working capital construction contingency escrow. See
Sections 12.8 and 12.15 for specific guidance. After all escrows and cash requirements are established
at initial endorsement, any balance remaining in the land escrow is deferred until operations of the
project have achieved 6 consecutive months of break-even occupancy. After this period the balance of
the escrow may be released to the borrower. (See Section 12.15.F for details.).
L. Cash-Out / Equity from Loan Proceeds Holdback – Section 223(f).
In cases where the Lender has determined a project with non-critical repairs is eligible for
cash-out, fifty percent (50%) of the cash-out proceeds must be held by the Lender until all
repairs are complete and HUD approves the release. The amount of proceeds held is any
amount after the funding of any transaction costs including the assurance of completion escrow
(20% repair costs) requirement. Lenders may request a waiver to allow holding back a lesser
percentage of cash-out proceeds. Waivers will only be considered when the holdback is
greater than both $1,000,000 and the assurance of completion escrow (20% of repair costs).
The Lender will set up the escrow at Initial/Final endorsement on Form HUD-92476.1M,
Escrow Agreement for Non-Critical, Deferred Repairs. Critical repairs are not subject to this
cash-out or withholding of proceeds. Critical repairs are completed before Initial/Final
Endorsement and not deferred.
M. Tax Credit Equity Contribution.
1. HUD requires that an appropriate amount of the equity be invested in the project and applied to
HUD-approved costs at the time of Initial Endorsement. The amount deemed by HUD to be
sufficient for such purposes will depend on the circumstances of each transaction, but should be an
amount that assures an ongoing relationship between the Borrower and the tax credit syndicator or
investor.
The initial installment of equity must be an amount that is equal to or exceeds 20% of the total
equity that will be available for the project. HUD has adopted a fixed pay-in schedule for all
LIHTC transactions, and therefore waivers of the first 20% equity pay-in will not be considered
(please refer to Chapter 14.15 of the MAP Guide). An example of Form HUD-92264-A to assist
with the calculation of the amount of the initial and subsequent infusions of tax credit equity
follows.
2. The initial installment of equity must be expended on the initial requisition at Initial Endorsement.
3. Example for Form HUD-92264-A.
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There is no change in the computation to determine the cash requirements and/or front money
escrow on Form HUD-92264-A. The initial installment of LIHTC equity is calculated as follows:
Form HUD-92264-A Section II. Total Requirements for Settlement – Part B
1. a. Development Cost ……………………………………………..
$14,381,216
1. c Total of lines a & b ……………………………………………..
$14,381,216
2. Land Indebtedness (or cash required for acquisition) …………….
$625,000
3. Subtotal (lines 1c + 2) …………………………………………….
$15,006,216
4. a. Mortgage Amount …………………………………..………….
$10,935,000
4. b. Home funds ……………………………………...……………..
$650,000
5. Fees not to be paid in cash ………………..………………………
$0
6. Subtotal (lines 4a+4b+5) ……………………..……………………
$11,585,000
7. Cash investment required (line 3 minus line 6) ……………………
$3,421,216
8. Initial Operating Deficit …………………………………….……..
$488,772
9. Other Cost (Bond cost $312,617) and $15,000 ……………..……..
$327,617
10. Working Capital ………………………………………….…..…..
$218,700
11. Other: Social Services Escrow $55,000 + Fee $2,066,897) .……..
$2,121,897
12. Total estimated cash requirement (sum of lines 7+8+9+10+11) …
$6,578,202
Front money escrow, if any (subtract line 6 from line 1) .…………..
$2,796,216
Section III. Source of Funds to Meet Cash Requirements
Source A
Tax Credit Equity ……………………..………
Source B
Developer Funds ……….………………………
Total available cash for project……………………….……….
$5,027,301
$1,550,901
$6,578,202
The initial 20% calculation of the tax credit equity for mortgageable items is $1,005,460. This is
based upon the mortgageable tax credit allocation of $5,027,301 x 20% = $1,005,460; it is not
based on the total cash requirements for the project. The remaining cash requirements not being
satisfied with LIHTC equity will be satisfied in accordance with outstanding instructions. The
Borrower must pay out-of-pocket when there is no available cash from mortgage proceeds.
4. Subsequent Investment of Tax Credit Equity Proceeds.
a. The Commitment for Insurance of Advances, Form HUD-92432, should contain, among other
special conditions, a requirement for evidence satisfactory to HUD of an agreement that binds
the investor to timely and periodically pay to the Borrower tax credit equity to contribute to the
completion costs, in the aggregate amounts shown on Forms HUD-2880 and HUD-92013. To
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that end, HUD requires that no less than an additional 30% of total tax credit equity be
contributed at no later than 65% of project completion, with an additional contribution of 45%
of equity paid in at project stabilization, regardless of whether the project is a new construction
or refinance. See the special conditions in Appendix 4D.
b. The actual amount of the initial equity investment should be reflected in the Firm Commitment
as a special condition and listed as a line item on the initial requisition, HUD Form HUD92403, Application for Insurance of Advance of Mortgage Proceeds, for immediate
disbursement.
8.15
Bond Financed Projects
A. Review of Financing Documents. A tax-exempt bond is a security issued by a governmental agency
in which the interest income produced is free from federal income tax and sometimes free from state
and/or local income tax. Financing documents associated with mortgage bonds or tax-exempt bonds
are prepared and reviewed by the bond underwriter and the bonds are secured by a mortgage on one or
more assets. In FHA insured transactions, these bonds are backed indirectly by an interest in the
insured loan which is further enhanced by a Ginnie Mae Security.
1. The Sponsor must submit, with the application for Commitment processing, a separate statement
itemizing the estimated costs of bond issuance, issuer fees and discounts and financing fees to be
paid out of pocket by the Sponsor/Borrower with an explanation of the necessity and
reasonableness of each cost.
The lender’s underwriter must check the statement for
reasonableness, using the data from previously processed bond-financed projects and make
adjustments where appropriate. This information is used to develop the Total Estimated Cash
Requirement Form HUD-92264-A, Supplement to Project Analysis.
B. Loan Rates.
1. The construction loan and the permanent loan rates may exceed the interest rate on the bond
obligations. When this occurs, the spread will create a surplus of funds which must be held by the
bond trustee. At initial closing, the bond counsel must supply HUD with a legal opinion stating
that any investment income received by the mortgagee but not held for its own account must be
under the control of the bond trustee and will not flow through the books and records of the
project. The bond documents will instruct the trustee to invest the funds in a federally-insured
interest bearing account, submit the project’s financial statement, or permit the Borrower to use the
surplus of funds to cover costs associated with the bond financing transaction.
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2. In many cases, the interest rate on the bonds will not be known during the Commitment
processing, and it is not uncommon for the rate to change once the bonds have been sold and the
bond interest rate has been established. If the mortgage rate changes, an amendment letter to the
Firm Commitment should be issued reflecting the actual interest rate. If, due to time constraints,
HUD does not have sufficient time to reprocess a higher mortgage for the project, the Firm
Commitment must contain the following condition:
“Any interest savings resulting purely from a differential between the HUD-processed interest rate
and the actual, final interest rate may not be construed as excess funds that may be used to offset
costs in other categories at the time of cost certification. Any such savings must be applied as a
mortgage reduction.”
NOTE: An exception to the above is that savings resulting from the early completion of
construction may be used to offset cost certifiable overruns in other cost categories. Compute
interest savings by:
a. Recalculating the interest line item on Form HUD-92264, using the actual interest rate for
the scheduled construction period.
b. Subtracting the actual interest cost recognized at cost certification from the revised interest
figure developed in (1) above.
c. HUD will allow a total financing and placement fee of 5.5% on bond financed applications.
This limit applies to all multifamily Sections of the Act except Section 223(a)(7) and is
reflected in the replacement cost mortgage amount confirmed at cost certification.
C. Bonds may be sold at a premium to investors, whereby the investor pays an amount in excess of the
face value of the bonds. The premium results from the bonds carrying a higher coupon rate than is
generally available in the marketplace.
1. Any premium raised by a transaction is considered part of the mortgagee, bond underwriter, or
issuer’s profit. However, if a mortgagee gives something of value without the expectation of being
repaid, HUD considers this to be a kickback. The one exception involves tax-exempt bond
transactions where the issuer of the bonds permits the Borrower to receive some portion of the
premium to offset the cost of issuance so that the mortgagee, bond underwriter and issuer are
simply conduits for the transfer of funds.
2. If any of the premiums is remitted to the Borrower, it will be considered excess investment
income, treated as project income, and used to reduce the total allowable cost of the project.
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3. On bond financed projects, the premiums may be treated as project income under the following
conditions:
a. The Sponsor/Borrower cannot benefit monetarily from the excess investment income.
b. The premium, if accessible to or given to the Sponsor/Borrower, is considered as excess
investment income.
c. Closing documents must detail the amount of the premium being given to the
Sponsor/Borrower.
d. The premium may be used to pay for additional cost associated with the cost of issuance and
may be applied to other recognizable cost overruns.
e. The Borrower’s accountant or the Borrower must detail in the notes to the financial statement
the amount of excess income received.
4. For nonprofit applications, excess income generated from premiums may be applied to
recognizable cost overruns. Any excess income over and above that used towards recognizable
cost overruns must be transferred to the reserve for replacement account.
5. On Section 223(f) applications, excess income generated from premiums must be transferred to the
Reserve for Replacement account.
D. Itemized Statement of Costs. An itemized statement of the costs of issuance of the obligations,
discounts and financing fees paid through the mortgagee must be attached to and reflected in the
Lender’s Certificate, Form HUD-92434M.
1. The statement must explain why each individual item is necessary for the issuance of the
obligations.
2. The lender must review the amount of each item to ensure its reasonableness in relation to
comparable projects.
3. A letter from the Regional Office Director will inform the mortgagee that HUD will recognize for
cost certification purposes the costs of issuance, discounts and financing fees in an aggregate
amount not to exceed 5.5% of the insured loan amount, which may be included in the mortgage for
all programs (except Section 223(a)(7)).
4. The mortgagee, bond underwriter, and issuer have the option of deferring collection of additional
discounts, financing fees, slow draw fees, etc., through the provision of Paragraph 20(G) of the
Lender’s Certificate (Form HUD-92434M).
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a. The deferred collection of these items must be an obligation of a third party. Both the third
party and the mortgagee bond underwriter or issuer must attest in writing that they will not
look for payment from the:
1) Borrower;
2) Mortgaged property;
3) Mortgage proceeds;
4) Any reserve or deposit required by HUD and/or the mortgagee in connection with the
insured mortgage transaction; or
5) Rents or other income from the mortgaged property.
b. The Borrower may issue, as evidence of the debt, surplus cash or a residual receipts note to the
third party for costs identified in this paragraph which HUD determines to be reasonable.
E. State and Local Bond Financed Projects.
1. Prepayment of Note. State and local bond financed projects are subject to prepayment restrictions
and penalty charges as provided in Chapter 11 Section 11.8.B.3.
2. State/Local Occupancy, Use and/or Rent Restrictions. Use or rent restrictions sought by the State
or local jurisdiction for projects financed by proceeds from State/local tax-exempt obligations are
often more restrictive than the minimum requirements of the Internal Revenue Code. The
Regional/Satellite Office Director may approve a State or local restriction exceeding the minimum
requirements of the Internal Revenue Code, but only if the following conditions are met:
a. The Regional/Satellite Office Director must determine that the restriction is not likely to have
an adverse impact on project occupancy, marketability or long-term feasibility. This
determination must be made on a project-by-project basis.
b. The restriction must not conflict with any applicable HUD mortgage insurance regulations or
related administrative requirements.
c. The restriction must not appear in the Note, Mortgage, Regulatory Agreement or any other
HUD/FHA loan document.
d. The restriction must be qualified to provide that it will automatically terminate in the event of
either foreclosure or transfer of title by deed in lieu of foreclosure. Such a termination
provision must be included in every legal instrument (e.g., deed, land use restriction
agreement, Security Agreement, or financing agreement) in which the restriction appears.
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F. Pre-Cost Certification Conference Information.
certification conference that:
Document page 295
The lender must demonstrate at the pre-cost
1. The net cost of negative arbitrage (i.e.: the bond escrow account yield vs. capitalized interest
expense) may be recognized if there are offsetting savings in the mortgage.
2. Any rebate to the Sponsor/Borrower from the mortgagee, issuer or bond underwriter will reduce
the mortgageable cost certification. The following are two samples of the most common types of
rebates.
a. If mortgagee/bond underwriter contributes a portion of the initial service charge that was
collected to pay discounts or other fees.
b. If mortgagee/bond underwriter refunds a portion of the construction loan interest to the
Borrower or Sponsor.
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Chapter Title:
Chapter 9
Environmental Review and Requirements
9.1
Introduction
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Chapter 9
Environmental Review and
Requirements
9.1
Introduction
This chapter outlines for the lender and HUD staff the policies and procedures that must be followed to
meet environmental responsibilities. The lender is required to make certain application submissions. If
additional or updated environmental information is required, it must be submitted in order for the
application to be considered complete. The lender may submit the reports required by this Chapter and
HUD staff may complete the HUD environmental review prior to submission of the application for Firm
Commitment in order to expedite the review, but should do so only when it is clear that the lender will
meet application for Firm Commitment deadlines and requirements.
This chapter cites many standards and guidance documents, such as ASTM standards. These are
frequently updated, and as such this chapter may make references that are outdated. Wherever standards or
guidance are cited in this chapter, HUD requires reliance on the most recent edition in force. This also
applies wherever sections, chapters, or addenda of the standards or guidance are cited. The comparable
sections, chapters, or addenda of the most current version in force should be referenced and relied upon. If
a referenced standard or guidance has been retired and not succeeded by a more current edition, HUD
requires reliance on the retired version until other guidance is issued.
A. Legal Authorities, Handbooks, and Forms.
1. All Federal agencies are required to comply with the National Environmental Policy Act of 1969
(42 U.S.C. 4321 et seq.) (NEPA), and the implementing procedures issued by the Council on
Environmental Quality at 40 CFR Parts 1500-1508. HUD regulations implementing NEPA are
contained in 24 CFR, Part 50, “Protection and Enhancement of Environmental Quality”. Related
Federal laws and authorities are listed in 24 CFR 50.4 and 50.3(i). HUD may not delegate its
environmental responsibilities to others; it is required to prepare the environmental review and
make the appropriate environmental finding, obtain all required review, comment and approvals
prior to issuing a Firm Commitment. (See 24 CFR 50.11.)
2. HUD has issued two handbooks covering environmental issues: Handbook 1390.2, “Environmental
Assessment Guide for Housing Projects”, and Handbook 1390.4 “Guide to HUD Environmental
Criteria and Standards contained in 24 CFR 51”. Informal guidebooks issued by HUD on
environmental issues are cited in this chapter. In addition, HUD offices may make the Guide,
“Choosing an Environmentally Safe Site”, which is used in the Section 202 and 811 programs,
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Chapter 9
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Introduction
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available to all projects. 21
3. HUD has established environmental Form HUD-4128, “Environmental Assessment and
Compliance Finding for Related Laws”, to document compliance with NEPA and other
environmental Federal laws, authorities, Executive Orders, and HUD standards. HUD has
established the HUD Environmental Review Online System (HEROS) – Form HUD 4128 for
HUD staff to document compliance with NEPA. The use of HEROS and the Form HUD-4128 to
document environmental assessments and reviews by HUD staff is required under 24 CFR 50.31.
The Phase I Environmental Site Assessment (ESA) must be cited as source documentation on the
relevant HEROS screens.
4. Existing apartment projects to be refinanced or purchased under Section 223(f) are categorically
excluded (CE) from NEPA compliance (see 24 CFR 50.20(a)), except in extraordinary
circumstances (see 24 CFR 50.20(a) and (b)), but they must comply with the laws and authorities
listed at 24 CFR 50.4. CE projects must also comply with the Contamination Analysis
requirements discussed at 9.3 (as required by 24 CFR 50.3(i)), and with the Lead, Asbestos and
radon report requirements discussed at 9.5.A, B, and C. If a project is CE, compliance with the
parameters related to Nuisances and Hazards at 9.5.P, such as pipelines, fall hazards, and oil gas
wells must be documented in HEROS – HUD Form 4128. Rehabilitation projects may also qualify
for a CE from NEPA compliance if they are not considered substantial rehabilitation (see 24 CFR
50.20(a)(2)(ii)). Note that for environmental review purposes, the term “substantial rehabilitation”
refers to rehabilitation that does not qualify for the CE in 24 CFR 50.20(a)(2)(ii). Please see
Chapter 5 for a definition of substantial rehabilitation that applies to other program purposes.
5. Pursuant to 24 CFR 50.19(b)(21), “refinancing of HUD-insured mortgages that will not allow new
construction or rehabilitation, nor result in any physical impacts or changes except for routine
maintenance” (emphasis added) is categorically excluded from the environmental assessment (EA)
requirements of the National Environmental Policy Act (NEPA), except in extraordinary
circumstances, and does not require compliance with the Federal laws and authorities specified at
24 CFR Part 50.4, other than for the flood insurance requirements specified at 24 CFR 50.4(b)(1).
Thus, Section 223(a)(7) projects are categorically excluded. Similarly, currently HUD-insured
Section 223(f) refinancing transactions that meet these criteria do not require an environmental
review. However, the flood insurance requirements specified at 24 CFR 50.4(b)(1) are still
applicable. For environmental review purposes, the term “maintenance” is explained in “Guidance
for Categorizing an Activity as Maintenance for Compliance with HUD Environmental
Regulations, 24 CFR Parts 50 and 58.” Note that this definition of maintenance is specifically for
environmental review purposes. Please see Chapter 5 for definitions of alterations and repairs that
1
The Guide Choosing an Environmentally Safe Site is available at: https://www.hudexchange.info/resource/83/choosing-anenvironmentally-safe-site/.
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apply for other program purposes. 2
6. Requirements in this chapter may exceed those of many State agencies. One reason for this is if a
mortgagor defaults on an FHA-insured project, HUD may become the project owner. Under
Section 120(h) of the Comprehensive Environmental Response and Liability Act (CERCLA),
Federal agencies that own properties are required to take “all remedial action necessary to protect
human health and the environment” with respect to known hazardous substances upon disposition
of the property. This requirement is beyond any liability releases under State or Federal law and
any due diligence requirements under CERCLA.
B.
Local, State, Tribal or Federal Laws.
1. The acronym LSTF as used in this chapter refers to “local, state, tribal or Federal”.
2. In cases where state or local laws, tribal laws, ordinances, codes or regulations are more restrictive
than Federal requirements, the borrower must comply with the stricter local or state standard
unless Federal law states otherwise. An Application for Firm Commitment does not relieve an
owner of responsibility for compliance with state or local requirements.
3. HUD will not assume any responsibility with respect to inspection, enforcement, interpretation or
determination of compliance with such state or local requirements.
4. Where the project is located on a Native American reservation, the tribal authority may assume the
responsibilities of the state or local environmental protection agencies.
5. This chapter is not a substitute for requirements in the laws, regulations, and Executive Orders
regarding environmental analysis and mitigation.
9.2
Procedures
A. Lender’s Responsibilities.
1.
All projects (new construction, substantial rehabilitation, refinancing or purchase) submitted under
MAP require the lender to make various submissions related to Contamination as stated in detail in
Section 9.3, unless the exemption for HUD-insured projects described at Section 9.1.A.5 applies.
2.
The lender must provide an Environmental Report to HUD. The Environmental Report must
address NEPA environmental factors, unless the categorical exclusions discussed at Section
9.1.A.4 or 9.1.A.5 apply. The Environmental Report must also address the environmental laws and
2
Guidance for Categorizing an Activity as Maintenance for Compliance with HUD Environmental Regulations, 24 CFR Parts
50 and 58, can be found at:
https://www.hudexchange.info/resource/3197/guidance-categorizing-activity-as-maintenance-environmental-regulations-24cfr-parts-50-and-58/
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authorities listed at 24 CFR 50.4, unless the categorical exclusion discussed at 9.1.A.5 applies.
The Environmental Report must identify any significant environmental issues to be resolved, and
is discussed in Section 9.5.
3.
The lender must provide a Lead Report to HUD, as discussed in Section 9.5.A.
4.
The lender must provide an Asbestos Report to HUD, as discussed in Section 9.5.B.
5.
The lender must provide a radon report to HUD, as discussed in Section 9.5.C.
6.
HUD environmental policy requires that there be a limitation of certain activities or actions by any
direct or indirect parties to the transaction from the time of initial contact with HUD until HUD has
completed the environmental review process. Initial contact includes Concept Meetings, preapplication or application submission, or other meetings or correspondence with HUD or with a
lender for the purpose of preparing an application for FHA multifamily mortgage insurance.
Specifically, no action concerning the proposal shall be taken prior to completion of the
environmental review which would: (1) have an adverse environmental impact, (2) limit the choice
of reasonable alternatives, or (3) prejudice the ultimate decision on the proposal. Activities that
limit the choice of reasonable alternatives include an action or commitment to undertake real
property acquisition, repair, rehabilitation, construction, demolition or site clearance.
a. Certain actions do not fall within such limitations, such as development of plans or designs, or
performance of other work necessary to support an application for Federal, State or local
permits.
b. Other actions do fall within such limitations, such as acquisition, demolition, modification of a
wetland, or actions that adversely affect a historic property. Pursuant to the “anticipatory
demolition” requirements of Section 110(k) of the National Historic Preservation Act (54
U.S.C. 306113), even before application submission takes place, any action by a potential
lender or borrower, or any action by another party that the lender or borrower has the legal
power to prevent, that is taken with the intent to avoid Section 106 review and that
significantly adversely affects a historic property, could result in rejection of an application.
c. If any party is unsure as to whether an action would fall within such limitations it should seek
advice and possibly approval by HUD. These requirements are distinct and separate from any
early start of contractually related construction activities as discussed in Chapter 12.
7.
Lenders are required to submit all the exhibits necessary to resolve any environmental issues with
the Firm application submission. For lenders that use the pre-application process for new
construction or substantial rehabilitation proposals, HUD requires the various reports listed in
Section 9.2.A. 2-5 and the Phase 1 to be submitted at pre-application, unless otherwise indicated.
The purpose of asking for certain documents at pre-application is to help make an early evaluation
of any environmental issues to be resolved so t HUD can determine if all environmental issues can
be resolved prior to issuance of the Firm Commitment. The letter of invitation will condition the
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issuance of a Firm Commitment upon the environmental review finding that there are no
unresolved environmental concerns.
8.
Any identified environmental issues will require a discussion of impacts to human health and
appropriate mitigation measures. The lender must provide mitigation plans for those environmental
problems when the application is submitted. Remediation of site contamination is discussed in
Section 9.3 of this chapter, and requires that LSTF approval of those plans be submitted with the
application for Firm Commitment. The implementation of mitigation and remediation plans may,
with HUD approval, continue throughout the construction period. HUD will review the lender’s
plan and make it a condition of the Firm Commitment if HUD considers the plan acceptable. This
would include any plans for remediation of site contamination, wetlands impacts, noise impacts,
radon, historic preservation, endangered species, acceptable separation distance (ASD), and/or
floodplain management issues.
9.
Removal or containment of lead-based paint or asbestos may continue beyond Initial and Final
Endorsement if HUD approves.
B. HUD Staff Responsibility.
1. In accordance with 24 CFR 50.32, HUD, not the lender, is responsible for independently
evaluating the information supplied by the lender in the Environmental Report, supplementing that
information as needed, making the required findings and preparing the environmental review in
HEROS – Form HUD-4128 and supporting documentation as the environmental record for the
project. HUD will determine whether the project raises environmental conditions that are
prohibited by law, Executive Order, or regulation, or which would endanger health or safety, or
would put FHA mortgage insurance or the U.S. Government at financial risk or liability.
2. HUD staff shall promptly notify the lender that it will take appropriate action to ensure that the
objectives and procedures of HUD environmental policy are achieved if it becomes aware that an
action subject to limitation as discussed in Section 9.2.A.6 has taken place or may be about to take
place.
3. Trained HUD staff must review the documentation submitted by the lender and must make a site
visit. The site visit will help validate the information provided on the Phase I ESA and
Environmental Report and is useful for evaluating other environmental factors. HUD staff will
supplement the lender’s documentation as needed, make the required findings and prepare Form
HUD-4128 and supporting documentation. HUD staff must certify the completed environmental
review in HEROS Form HUD-4128 as the preparer. The environmental review in HEROS-Form
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HUD-4128 must also be certified by an Approving Official, who has authority to issue a Firm
Commitment.
4. Regulation 24 CFR 50.32 requires that a NEPA Environmental Assessment for a project with more
than 200 units be sent for review and comment to the Regional or Field Environmental Officer
(REO/FEO) in whose jurisdiction the project is located. The REO/FEO must also be given the
opportunity to review and comment on any environmental review in HEROS - Form HUD-4128 in
which the project is in the normally unacceptable or unacceptable noise zone, where the REO/FEO
has prepared a special study for the environmental review, or as required by agency agreement or
Memorandum of Understanding. Projects that require an Environmental Management and
Monitoring Program as discussed at 24 CFR 50.22 require concurrence of the REO/FEO.
Categorically excluded projects, as discussed at Section 9.1.A.4, do not require review and
comment from the REO/FEO. However, it is recommended that REO/FEOs be given the option to
review and comment when special analysis is required under the laws and authorities listed at 24
CFR 50.4 or the project involves potentially significant environmental concerns. REO/FEOs
should be contacted for input early on during consideration of an application, including at Concept
Meeting.
5. Completed environmental records must be available for the REO/FEO to review. Up to ten percent
(10%) of files may be reviewed in any given year.
6. As part of its environmental review responsibilities, HUD may require additional environmental
material from a lender, such as a Phase II ESA or a Biological Evaluation, even when the lender
might not believe that such additional environmental material is necessary.7. HUD will discuss
any environmental conditions in the letter of invitation for Sections 221(d)(4), 220, 241(a) and
231. Any requirements that affect project design will be fully detailed. The lender must assure
that any requirements affecting project design are conveyed to the design architect for
incorporation into the contract drawings and specifications.
7. The Regional Office shall ensure that all environmental conditions are resolved and the
environmental review in HEROS – Form HUD4128 is completed and approved prior to issuance
of a Firm Commitment.
8.
When environmental reviews reveal environmental conditions that require mitigation, HUD will
require completion of mitigation prior to Firm Commitment or will condition Firm Commitment
on completion. HUD will discuss the requirements for completion of mitigation in the
environmental review (Form-4128). Mitigation plans will be detailed in agreements and/or other
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relevant documents. HUD may also require an Environmental Management and Monitoring
Program, as discussed at 24 CFR 50.22.
9. HUD shall mail completed environmental reviews to those who have requested them, in
accordance with 24 CFR 50.23. Additional efforts for involving agencies, tribes or the public shall
be made when required by the implementing procedures of the laws and authorities cited in 24
CFR 50.4.
HUD staff should refer to the specific directions and guidance contained in Section 9.4 for projects
that involve remediation and or monitoring.
C. Qualifications of Professionals.
1. The sponsor/developer will generally select the professionals who prepare the Environmental
Report, the Phase I ESA, or any other environmental information required by HUD, but the lender
must verify that the professionals used are qualified for their assigned responsibilities. It is
recommended that the professionals have prior HUD experience.
2. The Environmental Professional preparing the Phase I ESA must meet all of the qualification and
license/certification, education, and experience requirements of Appendix X2 of ASTM E 152713.
3. When a Phase II study is conducted, the “Phase II Assessor” must meet all of the qualification
requirements of Section 3.1.33 of ASTM E 1903-11.
4. Professionals may be required to evaluate technical areas, such as lead-based paint, asbestos,
radon, noise, wetlands, flooding, historic preservation or soil stability conditions.
D. Consulting with the Hub or Program Center.
Lenders should consult early with Regional staff 3 on HUD environmental requirements. Local
conditions and interagency relations affecting environmental review requirements differ from State to
State and from field office to field office. For instance, coastal zone management requirements are not
applicable in most states, but in states where they are applicable, compliance procedures differ. In
some states, a letter from the state coastal zone management agency for projects in the coastal zone is
required but in others, alternative review procedures make this unnecessary. Some states require
special licensure of professionals evaluating asbestos. lead-based paint, radon and soil stability
conditions.
3
For contact information, please see
http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/hsgmfbus/abouthubspcs.
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Contamination Analysis
The purpose of the requirements of this section is to identify manmade contamination on a site, other than
contamination from in-place building components such as asbestos containing materials (but see Section
9.5.B) or lead-based paint (but see Section 9.5.A), and to ensure that any contamination so identified is
mitigated to the point where it would be unlikely to “affect the health and safety of occupants or conflict
with the intended utilization of the property” as stated in HUD-wide policy at 24 CFR 50.3(i)(1).
Laboratory analysis may reveal naturally occurring contaminants in the pathway vectors (air, water,
groundwater, soil or sediment) surrounding the proposed HUD-assisted project at levels that pose a health
or safety risk to sensitive receptors. Mitigation might be required depending on the intended use of the
proposed project, the direction, the transmissivity, the proximity and the use of the pathway vectors with
respect to the location of the proposed project.
Any potential contamination issues should be discussed with HUD at the concept meeting.
recommended that lenders consult with HUD before a Phase II ESA is prepared.
It is
A. Phase I Environmental Site Assessment (ESA).
1.
Submission. The lender must submit a complete and final Phase I ESA with the pre-application
or, if the pre-application stage is omitted, with the application for Firm Commitment along with
the required documents listed in Section 9.2.A. 2-5. A summary submission is not acceptable.
The lender must inform the ESA preparer of all of the following Phase I ESA requirements:
a. Purpose. The Phase I ESA will make an initial determination as to the presence of
“hazardous substances” as defined by CERCLA, and of petroleum and petroleum products.
In addition, a purpose of the Phase I ESA is to document compliance with 24 CFR 50.3(i),
which states HUD’s policy that all properties proposed for use in HUD programs be free of
hazardous materials, contamination, toxic chemicals and gases, and radioactive substances,
where a hazard could affect the health and safety of occupants or conflict with the intended
utilization of the property. This purpose must be described in the “Purpose” subsection to the
required “Introduction” Section of the Phase I ESA. To meet this purpose, in addition to the
standard Phase I determination of whether Recognized Environmental Conditions (RECs)
have been identified in connection with the site, the Evaluation section’s discussion of
Findings, Opinions, and Conclusions should state whether further investigation or corrective
action is recommended to meet §50.3(i).
b. Format. The Phase I ESA must be prepared in accordance with the requirements of ASTM
E1527-13 “Standard Practice for Environmental Site Assessments, Phase I Environmental
Site Assessment Process”. The Phase I ESA must utilize the table of contents and report
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format specified in Appendix X4. The Phase I ESA must incorporate a vapor encroachment
screen performed in accordance with ASTM E 2600-10. The Phase I must clearly indicate
that HUD is an authorized user of the report.
c. Timing. The Phase I ESA must be conducted (meaning the earliest of the date of the site
visit, records review documents, or interviews) within one-year of the submission to HUD.
HUD may require updates or additional analysis in specific circumstances. A Phase I ESA
that was conducted more than 180 days prior to the submission date to HUD, but within the
allowable one year period, must be updated pursuant to Section 4.6 of ASTM E 1527-13. A
Phase I ESA prepared more than one year prior to submission to HUD, even if updated
within 180 days of being submitted, is not acceptable.
d. Preparer’s Qualifications. The Qualifications section of the Phase I ESA must describe the
preparer’s qualifications. The Environmental Professional preparing the Phase I ESA must
meet all of the qualification requirements of Appendix X2 of ASTM E 1527-13 and must
meet the license/certification, education and experience requirements of Section
X.2.1.1(2)(i), (ii) or (iii) of Appendix X2 of ASTM E 1527-13.
e. Findings Section. The Findings section of the Phase I ESA must list all known or suspect
Recognized Environmental Conditions (REC), Controlled Recognized Environmental
Conditions (CREC), Historical Recognized Environmental Conditions (HREC) and de
minimis conditions (such as minor soil staining). The Findings section must also list Vapor
Encroachment Conditions (VECs), likely VECs, and circumstances in which VECs cannot be
ruled out.
f. Opinions Section. The Opinions Section must discuss each finding from the Findings section
and whether it is a REC pursuant to Section 12.6 of ASTM E 1527-13. The justification for
any Finding deemed not to be a REC must be included in the Opinions section. If the ESA
preparer cannot make a statement as to whether a condition is or is not a REC, the Opinion
Section must state what information or further investigation would be deemed necessary to
make such a determination. The ESA preparer must also identify any data gaps. When
previous remediation has been performed or is ongoing, i.e., not yet an HREC at the
proposed site, the Phase I ESA must fully discuss the extent of such remediation in this
section of the Phase I ESA, including any involvement of LSTF Authorities. The Phase I
preparer must justify whether such ongoing remediation should resolve any RECs or
undecided issues identified in the ESA. Note that even if the Environmental Professional
preparing the Phase I ESA determines that a Finding does not rise to the level of a REC,
HUD may determine that the finding is a business environmental risk that warrants Phase II
investigation.
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g. Conclusions Section. The Conclusions Section must make a determination of whether a
REC, including a CREC, exists on the site in accordance with one of the two quoted
statements at Section 12.8 of ASTM E 1527-13.
h. In addition to the standard Phase I determination of whether RECs have been identified in
connection with the site, the Evaluation section’s discussion of Findings and Conclusions
should state whether further investigation or corrective action is recommended to meet 24
CFR 50.3(i).
i. User Provided Information Section. The borrower, or the current property owner (if different
from the borrower), shall complete the User Questionnaire(s) as per Appendix X3 of ASTM
E-1527-13 which must be included in the “User Provided Information Section” of the Phase I
ESA and the preparer must take into account any information provided in the preparation of
the Phase I ESA.
j. Testing Not Required. The Phase I ESA does not require sampling and testing which will be
performed during the course of a Phase II ESA or as part of a remediation plan (see below).
However it should reference and discuss any prior Phase II ESA performed in general
accordance with ASTM E 1903-11 including whether a condition is a REC.
k. Vapor Encroachment Screen. The Phase I ESA shall incorporate an initial vapor (a.k.a. gas)
encroachment screen to determine if there is a potential for vapors to occur in the subsurface
below existing and/or proposed on-site structures. Those hazardous substances may be
petroleum and petroleum products that consist of volatile organic compounds (VOC), semivolatile organic compounds (SVOC) and inorganic volatile compounds. The initial vapor
encroachment screen shall be performed using Tier 1 “non-invasive” screening pursuant to
ASTM E 2600 - 10 “Standard Guide for Vapor Encroachment Screening on Property
Involved in Real Estate Transactions, Section 8". If the Tier 1 vapor encroachment screen
determines that, as indicated in ASTM E 2600-10, Section 8.7.1, there is a “vapor
encroachment condition” (VEC) which is the “presence or likely presence” of such vapors in
the subsurface below existing and/or proposed on-site structures, a likely VEC, or that a VEC
“cannot be ruled out”, it must be deemed to be a REC for purposes of the Phase I ESA.
Vapor encroachment screen analyses must be integrated within the body of the various
sections of the Phase I ESA.
l. Lead-based Paint (LBP) Chips. LBP chips that are not inside or part of a structure may be
deemed to be a hazardous substance under CERCLA (see EPA document referenced at
Section 9.3.C.1.c.iv, below). Therefore, if there is or was a structure on the site that was built
prior to 1978, any evidence of paint chips not inside or part of any current structures must be
discussed in the “Site Reconnaissance” section of the Phase I ESA, must be listed in the
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Findings Section, and must be discussed further as to whether the paint chips are either a
REC or a de minimis condition in the Opinions section.
m. Previous Remediation. When previous remediation has been performed, or remediation is
currently taking place, the Phase I ESA must fully document such remediation, including any
involvement from LSTF Authorities.
n. Evaluation of the ESA. The Phase I ESA will be evaluated by HUD to determine if the
property is acceptable for the hazards reviewed. HUD may require additional information or
a Phase II based on findings that indicate an unacceptable business environmental risk. Any
Phase I ESA that identifies a REC will require a Phase II ESA, unless it can be determined
from the Phase I ESA that corrective action is not feasible. If no corrective action is feasible,
HUD may reject the property.
B. Phase II ESA.
1.
Purpose. The purpose of the Phase II ESA is to ascertain within the requirements of ASTM E
1903-11, “Environmental Site Assessments: Phase II Environmental Site Assessment Process”,
whether the RECs identified in the Phase I ESA have resulted in the presence of “hazardous
substances” as defined by CERCLA, and/or of petroleum and petroleum products at levels that
would exceed LSTF unrestricted criteria (de minimis levels). The Phase II ESA need not
necessarily be a complete site characterization (total nature and distribution) of contamination,
but must proceed to a point where it indicates the location of greatest concentration and risk,
taking in consideration all of the Recognized Environmental Conditions (RECs) identified in the
Phase I ESA.”
2.
Timing. The Phase II ESA shall be submitted with the pre-application or, if the pre-application
stage is omitted, with the application for Firm Commitment. It is recommended that lenders
consult with HUD before a Phase II ESA is prepared.
3.
When Required. A Phase II ESA is required if:
a. The Phase I ESA indicates that there is a REC; or
b. HUD requires a Phase II ESA for reasons that are described to the lender.
4.
Exception to Submission Requirement. In some cases wherein it is obvious that remediation will
be required, with HUD permission a separate Phase II ESA may be bypassed and instead
incorporated within the “site characterization” segment of the remediation plan referenced in
Section 9.3.C.1 below.
5.
Standards to Use. The Phase II ESA is to be performed pursuant to the logic model of ASTM E
1903-11, Section 7, including developing the conceptual model and validation.
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6.
Report Format. The Phase II ESA must be prepared in accordance with the requirements of
ASTM E 1903-11 using the table of contents and report format specified in Appendix X3.2 as
amended by X3.3. Some of the steps that a Phase II assessor might perform may be intuitive in
nature, but they nevertheless must be included in the report so as to ensure its scientific validity.
7.
New Construction or Substantial Rehabilitation Projects using Pre-application. For new
construction or substantial rehabilitation projects with a pre-application, the Phase II ESA, if
required, shall be submitted by the lender with the pre-application and must be reviewed by
HUD before an invitation letter is issued.
8.
HREC. If the Phase I ESA indicates that there is a HREC, as described in ASTM E 1527-13,
i.e., a hazard has been remedied and an LSTF Authority has issued a No Further Action (NFA)
letter or similar approval, HUD may either deem the NFA as completion of the remediation or it
may require a Phase II ESA and/or further remediation.
9.
Nature and Extent of the Study. The Phase II ESA need not necessarily be a complete site
characterization (total nature and distribution) of contamination, but must proceed to a point
where it indicates the location of greatest concentration and risk. However, when the existence
of elevated levels of contaminants is confirmed, a complete site characterization will be required
as a first step in remediation per Section 9.3.C.1 below.
10.
Vapor Encroachment/Vapor Intrusion. If it is determined that there is a potential for vapors to
occur in the subsurface below existing and/or proposed on-site structures either identified from
the Phase I ESA as a REC or from this or a prior Phase II ESA, the Phase II ESA shall include
either a Tier 2 vapor encroachment screen (per ASTM E 2600-10, Section 9), a vapor intrusion
assessment (VIA) pursuant to LSTF policy and/or procedure (as discussed in ASTM E 2600-10,
Appendix X7.1), or go directly to a Tier 4 “mitigation” (per ASTM E 2600-10, Appendix X7.1
or 7.2).
If a Tier 2 screen was performed and it determined that there was a VEC, a likely VEC, or that a
VEC could not be ruled out, either a vapor intrusion assessment (VIA) pursuant to LSTF policy
and/or procedure or Tier 4 “mitigation” (per ASTM E 2600-10, Appendix X7.1 or X7.2) is
required.
If a VIA was performed, any mitigation (or remediation) deemed necessary must follow LSTF
policy and/or procedure.
11.
Phase II Conclusion. The Phase II ESA must conclude that:
a. There are “hazardous substances” as defined by CERCLA, and/or of petroleum and/or
petroleum products at levels that exceed LSTF unrestricted criteria and list any chemicals so
found, or
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b. No hazardous substances, petroleum or petroleum products have been identified above de
minimis levels.
12.
Off-site contamination conclusion. The Phase II ESA must indicate whether there is a risk of
off-site contamination migrating on to the proposed site including if:
a. There is no known or perceived off-site contamination in the vicinity of the proposed site,
b. It is unlikely that any known or perceived off-site contamination will migrate on to the site,
or,
c. It is likely that known or perceived off-site contamination will migrate on to the site.
13.
The Phase II ESA written report must describe how it conforms to any applicable LSTF
requirements and must include a detailed, common language summary.
14.
Exception of requirement for Phase II preparation and submission for ongoing remediation. A
Phase II ESA is not required when remediation is ongoing to the point of not yet being an HREC
(see Section 9.3.A.1.e, above), if the Phase I ESA preparer states that such remediation should
resolve any RECs and undecided Phase I ESA issues, (see Section 9.3.A.1.f, above), and if the
remediation plan preparer indicates that all of the Phase II ESA requirements have been met.
C. Remediation Plans – General.
Remediation plans are required if the Phase II ESA concludes that hazardous waste or petroleum
products are present at levels that exceed LSTF unrestricted (de minimis) criteria, and/or that it is
likely that known or expected off-site contamination will migrate on to the site. The following
requirements apply to all remediation plans:
1. Complete site characterization.
a.
Anytime a site has been identified from a Phase I or Phase II ESA as having contamination (or
contamination exposure pathways), be it vapor (gas), liquid, solid, dissolved, or non-aqueous
phase liquid (NAPL), above LSTF unrestricted (de minimis) criteria, a complete site
characterization (sometimes known as special site assessment report, a detailed Phase II ESA,
or a Phase III ESA) must be prepared as the initial step of any remediation plan.
b. It must determine the total nature and distribution of such contamination, exposure pathways,
and potential receptors (a.k.a., a conceptual site model). However, if the remediation plan
preparer determines that the Phase II ESA preparer has already determined the nature and
distribution of such contamination, exposure pathways and potential receptors, then such
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determination shall be so indicated and the Phase II ESA shall be made a part of the
remediation plan.
c. It must be based on the appropriate combination of the following ASTM Practices and Guides,
as determined by the remediator’s environmental investigator. Lesser degrees of site
assessments or non-conformance are not acceptable. For lead contaminated sites, refer to the
listed EPA Handbook.
i.
D 6235-04 (2010), “Practice for Expedited Site Characterization of Vadose Zone and
Groundwater Contamination at Hazardous Waste Contaminated Sites”
ii.
E 1689-95 (2014), “Standard Guide for developing Conceptual site models for
Contaminated Sites”
iii.
E 1903-11, “Environmental Site Assessments: Phase II Environmental Site Assessment
Process”
iv.
E 1912-98 (2004), “Guide for Accelerated Site Characterization for Confirmed or
Suspected Petroleum Releases”
v.
EPA, “Superfund Lead-Contaminated Residential Sites Handbook”, 2003, available at
http://www.epa.gov/superfund/lead/guidance.htm.
d. The requirements of Section 9.3.C.2, 3, and 4 must be met.
e. It must discuss how it complies with the listed Practices or Guides and/or appropriate LSTF
procedures, and with any LSTF regulatory requirements.
2. Any remediation studies and plans must be in the form of a report which includes a detailed,
common language summary.
3. The remediation plan preparer’s qualifications must be discussed in any remediation reports.
4. The remediation plan must cover all relevant contaminant phases: vapor (gas), liquid, solid,
dissolved, and NAPL.
5. The remediation plan must require either the removal of contamination to LSTF unrestricted (de
minimis) criteria pursuant to 9.3.D or incomplete removal of contamination to restricted residential
levels in the form of a Risk-Based Corrective Action pursuant to 9.3.E.
6. Any remediation studies and plans must be submitted to HUD with the pre-application or, if the
pre-application stage is omitted, with the application for Firm Commitment. Evidence of approval
of the remediation plan by the LSTF authority must be submitted with the Application for Firm
Commitment. For lenders using the pre-application process, HUD will review remediation plans
before an invitation letter is issued.
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7. If HUD determines that it is uncertain whether implementation of the remediation plan will meet
the requirements of either 9.3.D or 9.3.E, the remedial work must be completed, including
clearance testing, and the remediation itself must be approved, including issuance of any clearance
and closure documents, by the LSTF authority prior to issuance of the Firm Commitment.
8. If the extent and cost of removing the contamination can be definitively determined, and the cost
of removing that contamination can be specified pursuant to a contract for remediation (see
Section 9.4), HUD may allow a remediation plan that has been approved by the LSTF authority
that:
a.
Permits the remediation including site testing, any clearance and closure documents, and the
approval by the LSTF, prior to Initial Endorsement, or
b.
If the lender can show why it would be impractical to complete remediation prior to Initial
Endorsement, permit the remediation including site testing, any clearance and closure
documents, and the approval by the LSTF, prior to Final Endorsement and initial occupancy.
9. All residents living regularly and construction workers working regularly on site while remediation
is taking place shall be informed of the remediation activities and protected from any potential
contamination. This requirement must be a part of the remediation plan.
10. Remediation contract insurance. Unless HUD determines otherwise, the remediation contract shall
require cost cap and reopener insurance coverages, copies of which are to be included in the
remediation plan.
11. Ongoing Remediation. If remediation is taking place or has been completed but has yet to receive
approval by the LSTF at the time of submission of the Phase I ESA, the remediation plan and all
remediation studies shall be submitted, along with a detailed common language summary, at the
same time as the Phase I ESA.
D. Remediation Plans – Complete Removal of Contamination.
1. Except for situations where Section 9.3.E (Remediation Plans Allowing for Incomplete Removal
of Site Contamination) applies, the lender must submit a remediation plan designed to bring the
contamination identified by a complete site characterization per Section 9.3.C.1 to LSTF
unrestricted criteria (de minimis) levels, with no ongoing active or passive remediation. There
must not be any need for engineering controls, institutional controls, or monitoring wells.
2. All of the requirements for Section 9.3.C must be met.
3. A remediation plan that involves control of off-site contamination per Section 9.3.G and/or Tier 4
vapor encroachment mitigation per Section 9.3.B.10 is not permitted under this section, but may be
allowed under Section 9.3.E.
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E. Remediation Plans – Incomplete Removal of Contamination.
1. If the costs are deemed to be exorbitant and/or the feasibility deemed impractical for remediation
of on-site contamination to LSTF unrestricted criteria (de minimis) levels, or if there is known or
expected offsite contamination that poses a risk to the project site, the remediation plan may allow
for incomplete removal to LSTF restricted residential criteria levels.
2. Justification for incomplete removal of contamination must be submitted along with the
remediation plan and must include documentation that shows that the cost of the incomplete
removal of contamination, including any life cycle costs for Operation and Maintenance and any
applicable enforcement requirements of LSTF authorities, are sufficiently below the costs of
complete contamination removal, per Section 9.3.D above.
3. The corrective action must be a Risk Based Corrective Action (RBCA) based on the appropriate
combination of:
a. The following ASTM Guides and Practices, as determined by the remediator’s environmental
investigator:
i. E 1689-95 (2014), “Standard Guide for developing Conceptual site models for
Contaminated Sites”
ii. E 1739-95 (2015), “Standard Guide for Risk-Based Corrective Action Applied at
Petroleum Release Sites”
iii. E 1943-98 (2010), “Standard Guide for Remediation of Groundwater by Natural
Attenuation at Petroleum Release Sites”
iv. E 2081-00 (2015), “Standard Guide for Risk-Based Corrective Action”
v. E 2091-11, “Standard Guide for Use of Activity and Use Limitations, Including
Institutional and Engineering Controls”
vi. E 2435-05 (2015), “Standard Guide for Application of Engineering Controls to Facilitate
Use or Redevelopment of Chemical-Affected Properties”
vii. E 2616-09 (2014), “Standard Guide for Remedy Selection Integrating Risk-Based
Corrective Action and Non-Risk Considerations” viii.
viii. E 2600-10, “Standard Guide for Vapor Encroachment Screening on Property Involved in
Real Estate Transactions” For Lead Contaminated Sites, EPA, “Superfund LeadContaminated Residential Sites Handbook”, 2003, available at
http://www.epa.gov/superfund/lead/guidance.htm.
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b. LSTF regulatory procedures may be followed in lieu of the ASTM Guides and Practices, as
listed above, when the remediator’s environmental investigator determines they are equivalent
to the ASTM standards or of greater stringency.
4. The RBCA must always meet the requirements of any LSTF regulatory authority for restricted
residential criteria levels.
5. The RBCA report(s) must:
a. Meet all of the requirements of Section 9.3.C;
b. Discuss how the remediation plan complies with the applicable ASTM Guides and Practices
and/ or LSTF regulatory procedures as discussed in Sections 9.3.E.3, above;
c. Discuss how it meets or will meet all of the requirements of Section 9.3.E.6; and
d. Discuss how it meets or will meet all of the requirements of Section 9.3.F through J.
6. The RBCA must be supported by the applicable combination of:
a. Engineering and Institutional Controls (EC/IC). An appropriate mix of engineering controls
such as capping and slurry walls, and institutional controls such as protective covenants and
access restrictions are usually required for all RBCAs, shall follow the guidance in ASTMs E
2435-05 (2015) and E 2091-11, and must indicate how it met these Guides. LSTF regulatory
provisions may be followed in lieu of these ASTM Guides, as amended when the remediator’s
environmental professional determines their equivalence. EC/IC may include:
i. Hard/Soft Cap Engineering Control. A hard cap EC, such as concrete, generally is required
if any contamination will remain on the site after Final Endorsement. Unless the lender can
justify why a lesser depth to contamination would be protective of the health and safety of
occupants, the depth of any remaining contamination should be greater than the deepest of
the following:
• the depth of the foundations of any existing or proposed structures including sumps;
•
the depth of any existing or proposed utilities on site; or
•
five feet below the surface.
HUD may allow for a soft cap (e.g. dirt) if other engineering controls such as an
impenetrable geotextile fabric are included. If EC are not required for a soft cap, IC is still
required.
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ii. Slurry Wall or Equivalent Engineering Control. A slurry wall or equivalent type EC may
be required to prevent offsite contamination from migrating onsite or to prevent onsite
contamination from migrating onsite or offsite. If the Phase I and/or Phase II ESA
determines that the likely existence of off-site contamination presents a risk to the site, such
a slurry wall or equivalent type EC will be required.
iii. Monitored Natural Attenuation and Enhanced Passive Remediation (MNA/EPR).
MNA/EPR such as by bio-augmentation where no additional active input is required and
passive engineering controls such as a slurry wall may be allowed as part of the RBCA. In
such cases, the LSTF authority must issue a conditional No Further Action Letter or similar
approval. Monitoring wells pursuant to the above RBCAs and meeting the requirements of
Section 9.3.F will be required to monitor the progress of the remediation. When
MNA/EPR is part of the RBCA, the remediation may continue beyond Initial Endorsement
provided that the LSTF authority has determined in writing that such undertakings would
present no threat to health, safety or the environment.
iv. Vapor Encroachment/Vapor Intrusion Mitigation. If a VEC is present, a VEC is likely
present, or a VEC cannot be ruled out, then mitigation as discussed in ASTM E 2600-10,
Section 7.2 is required, unless a VIA has been, or will be, performed pursuant to LSTF
policy and/or procedure. When remediation goes directly from a Tier 1 screen or a Tier 2
screen, such controls shall, where feasible, consist of a poured-on vapor barrier to be used
in conjunction with active and passive venting systems.
v.
IC regarding groundwater contamination, if applicable, must be put in place.
b. Operations and Maintenance (O&M) Plans. Any time there is an EC/IC there must be an
O&M plan which itself is an IC. The O&M plan must be approved by the LSTF authority, and
must discuss any associated enforcement required by LSTF authorities. An O&M plan must be
in place for management of all contamination remaining on the site and any controls thereof. If
HUD determines that the mortgagor does not have sufficient capacity to manage the O&M
plan, the mortgagor must contract an appropriate servicer to do so. The O&M Plan must ensure
maintenance of any engineering controls and assign responsibility for that maintenance. (See
Section 9.4. for costing.).
c. No Further Action Letter (NFA). The LSTF authority must issue an NFA, or similar approval,
except that a conditional NFA may be allowed pursuant to MNA/EPR (see 9.3.E.6.a.iii). The
LSTF authority must indicate in the NFA that the remediation that has taken place or will take
place protects the health and safety of occupants and does not conflict with the intended
utilization of the property. Usually, this will be satisfied by a statement that the remediation
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meets LSTF residential use standards. The NFA must be submitted to HUD pursuant to the
timeline required by 9.3.C.7 and 9.3.C.8.
d. Groundwater Requirement. A site is or will be otherwise acceptable if contamination exists in
the groundwater after completion of remediation, if:
i. IC regarding the groundwater is/will be put in place, along with an O&M plan, approval by
the LSTF authority, and any applicable enforcement requirements of LSTF authorities.
The ICs must prohibit any and all uses of the groundwater;
ii. The highest anticipated levels of groundwater based on high groundwater and/or100 year
flooding events, are below the levels of any construction or potentially anticipated utility
work unless it can be shown how such high groundwater levels will not modify the
horizontal and vertical extent of contamination to such a degree that it could affect the
health and safety of residents and workers; and
iii. Any vapors from groundwater and/or soils are shown not to present a significant risk
pursuant Tier 1 vapor encroachment assessment, Tier 2 vapor encroachment assessment,
VIA, or mitigation.
e. Safety of and Disclosure to Residents and Workers. Any time contamination above de minimis
levels is allowed to remain on site after initial occupancy and final closing, all maintenance
workers who might perform activities that could compromise the EC/IC, construction workers,
and building residents, etc. are to be informed of the general type and extent of contamination
and the protective measures that have been taken. It would be up to residents to inform any of
their visitors/guests of these conditions.
f. Hazardous Substance Quantification. If any RBCA remediation plan identifies hazardous
substances (listed in 40 CFR 302.4) that will remain on the property after Final Endorsement,
such plan shall determine the quantity of such hazardous substances and whether it exceeds the
levels indicated at 40 CFR 373.2(b). (This is a requirement under CERCLA that would apply
to HUD at any, time that HUD might own the property or take over its management.).
F. Monitoring Wells, Flushing Wells, or Testing Wells.
1. General Requirements. The presence of a testing or monitoring well on the property does not
bar the property from consideration for mortgage insurance. If a monitoring well is required to
confirm that contaminants have been removed to intended levels or that an MNA/EPR is
working properly, EC/IC will be required until such time as contaminants are reduced to de
minimis levels and a Final NFA letter is issued.
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2. Monitoring Well Protocols. Monitoring protocols must be specified in the RBCA and
monitoring must proceed until contaminants have been removed to intended levels or that
passive MNA/EPR is working properly.
3. Off-site Contamination – Acceptability. If a monitoring well is required to determine if
existing or assumed off-site contamination has migrated or might migrate on-site, the site is
generally not acceptable unless associated EC/IC are put in place pursuant to a RBCA or unless
the LSTF authority provides a statement that such off-site contamination would not present a
risk to the health of the project’s occupants if it were to migrate on-site.
4. Flushing Wells – Unacceptable. In no case may Final Endorsement/initial occupancy take
place when a flushing well is in operation or will be required.
5. Testing or Monitoring Wells Ordered by LSTF. A testing or monitoring well may also be
placed on the property by order of the LSTF to test or monitor contamination on the site or
from a neighboring site. If a monitoring well would be required or exists solely to monitor the
general health of an aquifer used as a water supply or potential water supply, but not in relation
to an existing or potential hazardous condition, this is not a bar to environmental approval.
However, the lender must notify HUD if there is any current or intended placement of a
monitoring or testing well.
6. Non-operating Wells. Non-operating wells are not a bar to environmental approval, but must
be capped over and closed out pursuant to the appropriate LSTF authority.
G. Off-site Contamination.
If the Phase I and/or Phase II ESA determine that the existence of off-site contamination presents a risk to
the site or the residents of the project and the sponsor has no control over the off-site locations of the
contamination, the site is not acceptable unless such off-site contamination is subject to a RBCA meeting
all of the requirements of Sections 9.3.C and E.
H. Escrow.
Any monitoring wells and engineering controls, such as caps or slurry walls, may warrant an escrow
account to be established by the lender at Endorsement to offset the cost of any ongoing maintenance.
See 9.4.C. for further discussion.
I. Waivers.
If a Regional Office intends to waive any of the requirements in this Section 9.3 that are not regulatory in
nature, the advice of the Departmental and/or Housing Environmental Officer, or the applicable REO/FEO
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in whose district the project is located, should be obtained before the waiver is granted to ensure that such
waiver is in compliance with the environmental requirements of 24 CFR 50.3(i).
J. LSTF Approvals and Reviews.
Any approvals by an LSTF authority must be given directly by that authority and may not be given by a
third party approved by that authority to act in lieu of the authority itself. Approvals by local authorities
are only acceptable when such authority is acting under delegation from the State.
K. Unacceptable Sites.
A site over a former solid waste landfill/dump and/or Superfund (National Priorities List (NPL)) site is not
acceptable for development unless the hazardous substances, petroleum, and petroleum products are
completely removed or remediated to restricted residential standards and the site is delisted, or for an NPL
site only, the Federal Agency with management authority over the site gives written approval of the site
for residential usage.
9.4
HUD Staff
Remediation
Responsibilities in Reviewing Cases Requiring
A. General Responsibilities.
The Department assumes greater risk any time that a Firm Commitment is issued on a contaminated site,
which risk is even greater when a loan is on a site where complete removal of contamination is not
possible, requiring monitoring possibly with continuous remediation techniques such as MNA/EPR.
Therefore, HUD staff must exercise great care in the review process to assure that all reasonable measures
are taken to mitigate HUD’s risk exposure and that an accurate determination is made of any remediation
costs that are included in the HUD-insured mortgage. Any special site assessment reports, Phase II or
Phase III ESAs should be reviewed so that the extent of the contamination is fully understood. Although
the lender is responsible for assuring that environmental remediation contractors are qualified and
experienced, field staff must still review references and qualifications and are strongly encouraged to
consult with an REO/FEO at the start of any remediation discussion.
B. Complete Removal of Site Contamination.
1. Technical Reviews. Trained Underwriting or Technical staff (often an Appraiser) is responsible
for the review of all environmental documentation and for the preparation of the environmental
review in HEROS - Form HUD-4128, which may be supplemented as needed to document the
review and HUD’s conclusions as to the adequacy of the proposed remediation plan.
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Any estimates of value or rents should be made as if the project is unaffected by contamination and
conditioned on successful removal. The appraisal must address any effect of marketability that
may be present due to the prior environmental history.
2. A/E and Cost. A construction analyst should review the cost estimate of the remediation plan to
determine whether it is reasonable and if the remediation and removal contractor is appropriately
bonded and qualified. Cost data for remediation is not as plentiful as with more routine
construction tasks. “Environmental Remediation Estimating Methods” might be helpful in some
cases and is available through RS Means at http://www.rsmeans.com. In addition, the A/E and
Cost staff may consult with local environmental remediation professionals about costs for similar
work.
3. Mortgage Credit. The HUD underwriter shall determine escrow, performance and bond payment
requirements. The amount of the escrow or bond shall be based on the estimated cost of the
mitigation work from the contractor, at 150% of the estimated cost. The cash requirements for the
escrow or bond, and the lender and Mortgage Credits procedures for administering the escrow,
shall be in accordance with existing closing instructions in the FHA Multifamily Program Closing
Guide. Higher escrow or bonding requirements will be necessary if Multifamily Regional staff
and/or the REO/FEO determine that there is a greater than average risk that unforeseen problems
may arise, resulting in increased cost based on previous experience with similar work and/or
research through local environmental remediation contractors about their experience in containing
the cost within their stated estimate.
C. Incomplete Removal of Site Contamination.
1. HUD staff should follow the guidance in Section 9.4.B regarding initial removal or mitigation
costs.
2. HUD staff must assure that the cost of any requirement for continuous monitoring and/or
mitigation is accommodated. An escrow account established by the lender at Endorsement may be
the most appropriate choice. This may also be accomplished by including the cost in Section E of
the HUD-92264 under “Other Maintenance” and would include fees charged by service providers
who are engaged to perform monitoring. If an expense is for actual or anticipated replacement of
a component such as a pump, it should be included in the Reserves for Replacement. The basis for
the expense or additional replacement reserve will be obtained from a qualified engineer and/or
contractor. The engineer/contractor’s estimate should be sufficiently detailed and supported to
allow review by the construction analyst as well as the appraiser.
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Any effect on project marketability, value or rents due to the need for continuous
monitoring/mitigation must be quantified and discussed in the appraisal.
D. Management, Coordination and Communication.
The Department assumes greater risk in cases involving environmental mitigation that will occur after
Initial Endorsement especially when mortgage proceeds are used to fund the cost of remediation. Extra
attention must be given to the need for frequent communication, preferably with written documentation,
between disciplines that are coordinated by team leaders and Multifamily Regional Center Directors
relating to levels of contamination, cost estimates and the certainty of the effectiveness of mitigation.
E. Insurance/Guarantee Requirements.
Borrowers are required to obtain separate insurance for environmental hazards from an insurer acceptable
to HUD if remediation work will be done on the site during the insured loan period, if the coverage is
available. Environmental hazard insurance typically covers liability and cost of completion.
The environmental remediation contractor will almost always be different from the project's general
contractor. Aside from the contractor qualifications, licensure and bonding that are addressed above, the
remediation contractor must provide HUD a separate guarantee of completion for their work on a form
prescribed by HUD.
9.5
Environmental Report
The lender must submit a narrative Environmental Report to provide information regarding compliance
with the NEPA environmental factors, the laws and authorities listed at 24 CFR 50.4, and the HUDspecific requirements described herein, as applicable, as well as any issues that might affect the
acceptability of the project, including any issues of compliance with state environmental laws. Each
authority must be addressed, unless a CE applies (see 9.1.A.4 and 9.1.A.5, above) or an exception is
otherwise noted below. If a CE or other exception applies, the application or Environmental Report must
include a statement to that effect. The Environmental Report must include and appropriately cite
supporting documentation. The failure to submit applicable supporting documentation may cause delays
in the environmental review process.
The information below provides background information on some of these authorities; more information
can be found in the authorities. The Environmental Report must be submitted at pre-application for those
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lenders using the pre-application process, or at the application for Firm Commitment stage for others.
HUD may request additional data or studies to comply with these requirements.
The following environmental issues must be included as applicable:
A. Lead-Based Paint
B. Asbestos
C. Radon
D. Historic Preservation
E. Floodplain Management
F. Wetlands Protection
G. Endangered Species
H. Noise Analysis
I. Explosive/Flammable Hazards
J. Coastal Barrier Resources
K. Coastal Zone Management
L. Sole Source Aquifers
M. Airport Clear Zones
N. Environmental Justice
O. Other Federal or State Laws
P. Additional Hazards and Nuisances
The issues discussed in detail below must be analyzed by HUD staff during their preparation of the
environmental review in HEROS - Form HUD-4128 and provide guidance by which the lender can assist
HUD. These brief descriptions are not substitutes for the requirements in the statutes, regulations,
Executive Orders, and handbooks. Note that “Toxic Chemicals and Radioactive Materials” should be
included in the Phase I ESA discussed above.
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A. Lead-Based Paint (24 CFR Part 35).
1.
Lead-based paint requirements are applicable to multifamily housing constructed before 1978, in
accordance with 24 CFR Part 35.
Exceptions:
a. The project is proposed for demolition provided the property will remain unoccupied until
demolition;
b. The housing is designated exclusively for the elderly or persons with disabilities, unless a
child of less than 6 years of age resides or is expected to reside there.
c. Zero-bedroom dwelling units.
Exemption: An application for insurance in connection with a refinancing transaction where an
appraisal is not required under the applicable procedures established by HUD.
2.
HUD regulations regarding lead-based paint are found at 24 CFR Part 35, copies of which, along with
guidance
materials,
may
be
downloaded
from
http://portal.hud.gov/hudportal/HUD?src=/program_offices/healthy_homes,
or
obtained
by
telephoning 1-800-424-LEAD. The helpful Lead Rule Compliance Advisor is available at
http://portalapps.hud.gov/CorvidRpt/HUDLBP/welcome.html.
3. For pre-1960 residential properties that do not involve conversions or major rehabilitation, the leadbased paint report shall consist of a risk assessment to identify lead-based paint hazards, performed in
accordance with 24 CFR 35.1320(b), by a certified lead-based paint risk assessor. Any identified
lead-based paint hazards must be treated with “interim controls” in accordance with 24 CFR 35.1330
and shall be considered to be completed when clearance is achieved in accordance with 24 CFR
35.1340. Interim controls generally should be completed prior to issuance of the Firm Commitment,
but with HUD approval, may be completed prior to Final Closing under conditions in the Firm
Commitment which require an escrow of sufficient repair or rehabilitation funds. Before the issuance
of the Firm Commitment the sponsor shall agree to incorporate ongoing lead-based paint maintenance
into regular building operations and maintenance activities in accordance with 24 CFR 35.1355(a).
See 24 CFR 35.620.
4. For multifamily properties constructed after 1959 and before 1978 that do not involve conversions or
major rehabilitation, before the issuance of the Firm Commitment the sponsor shall agree to
incorporate ongoing lead-based paint maintenance practices into regular building operations in
accordance with 24 CFR 35.1355(a). See 24 CFR 35.625
5.
For conversions and major rehabilitations (defined as “rehabilitation that is estimated to cost more
than 50% of the estimated replacement cost after rehabilitation”), a “lead-based paint inspection” to
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identity the presence of lead-based paint shall be performed in accordance with 24 CFR 35.1320(a),
by a certified lead-based paint inspector. The Firm Commitment shall require that any lead-based
paint identified on the property shall undergo “abatement” in accordance with 24 CFR 35.1325 with
the abatement to be completed prior to both initial occupancy and Final Closing. HUD will generally
require that such abatement be achieved through paint removal or component replacement. However,
if the sponsor can demonstrate that paint removal or component replacement is not practicable
because the substrate material is architecturally significant and would be damaged by so doing, HUD
may approve permanent encapsulation or enclosure and incorporation of ongoing lead-based paint
maintenance into regular building operations maintenance activities. Abatement is considered
complete when clearance is achieved in accordance with 24 CFR 35.1340. See 24 CFR 35.630.
6.
If an evaluation or hazard reduction is undertaken, the sponsor shall provide a notice to occupants in
accordance with 24 CFR 35.125. The sponsor shall also provide the lead hazard information
pamphlet in accordance with 24 CFR 35.130.
7.
The cost of lead-based paint abatement or hazard control work may be included in the proposed
mortgage loan with HUD approval.
8.
Most sale and rental transactions are also subject to the HUD-EPA lead-based paint disclosure rules
at 24 CFR Part 35, Subpart A.
B. Asbestos (24 CFR 50.3(i)).
1.
While many uses of asbestos are technically allowed today, several uses of asbestos have been
banned starting in the early 1970s, and many commercial enterprises may have stopped installing
asbestos products as of the late 1970s. Some of the more common examples of asbestos
containing materials include insulation, sprayed on finishes, such as ceilings, vinyl floor tile and
the adhesive to fix the tile in place, siding, and roofing. Asbestos studies and information must be
included in the Environmental Report, in accordance with HUD’s environmental policy articulated
at 24 CFR 50.3(i), that properties proposed for use in HUD programs be free of hazardous
materials, contamination, toxic chemicals and gasses, and radioactive substances, where a hazard
could affect the health and safety of occupants or conflict with the intended utilization of the
property.
2.
For any structures on the site built before 1978 which are to be demolished, a comprehensive
building asbestos survey by a qualified asbestos inspector is required. It must be performed
pursuant to the “pre-construction survey” requirements of ASTM E 2356-10, “Standard Practice
for Comprehensive Building Asbestos Surveys”.
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3.
Other than for structures to be demolished, on any building built before 1978, a qualified asbestos
inspector must perform a comprehensive building asbestos survey pursuant to the “baseline
survey” requirements of ASTM E 2356-10, “Standard Practice for Comprehensive Building
Asbestos Surveys”. In those cases where suspect asbestos is found, it should either be assumed to
be asbestos or should require confirmatory testing.
4.
If there is asbestos and it is friable or damaged, HUD requires that it be removed. If asbestos is not
friable or damaged, HUD strongly recommends that at a minimum it be encapsulated, which
would be incorporated in an O&M plan.
5.
The asbestos survey must be submitted with the application as part of the Environmental Report. If
the survey identifies asbestos or asbestos is assumed, HUD will condition the Application for Firm
Commitment on an appropriate mix of asbestos abatement and an asbestos O&M plan.
6.
Other than for asbestos abatement on a structure that will be completely demolished, the cost of
any asbestos abatement activities may be included in the proposed mortgage loan.
7.
All asbestos abatement shall be done in accordance with EPA requirements for air pollution
prevention pursuant to 40 CFR, subpart M especially, 40 CFR 61.145 and OSHA requirements for
Worker Protection, pursuant to 29 CFR 1926.1101, and any LSTF asbestos abatement and worker
protection rules. All asbestos abatement must be performed by a qualified asbestos abatement
contractor.
C. Radon (supersedes ML 2013-07)
1.
Background. One common constituent of soil and rock is the unstable element uranium. One of the
decay products of uranium is radon, a colorless, odorless gas. Under certain natural conditions, the
radon gas can enter surface soils and become part of the “soil gas” environment, which then can
enter the air, including air inside of buildings. When soil gas that contains radon enters a building,
radon and its decay products are either directly inhaled, or attached to dust on walls, floors and in
the air, which then can be inhaled. These decay products then undergo further decay, resulting in
the release of subatomic alpha particles. This alpha particle radiation can cause mutations in lung
tissue which can lead to lung cancer. The risk of contracting lung cancer from radon increases with
an increase in the concentration of radon in the air that is breathed by building occupants. EPA
recommends mitigation for residences with radon concentrations at or above 4 picocuries per liter
of air (pCi/L).
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2. General Requirements.
a. Radon Report.
i.
The radon report is required for all applications, unless an exception listed in Section 9.5
C.2.c. applies.
ii.
The radon report shall be included in the pre-application, or application, as applicable.
iii.
Contents. The radon report shall include the results of any testing performed, the details
of any mitigation deemed necessary, and the timing of any such mitigation. An amended
radon report must be issued if the testing and/or mitigation must occur after application
submittal according to the requirements below. The radon report must be signed and
certified as to its compliance with the requirements of this section by a Radon
Professional.
b. Radon Professional.
i.
All testing and mitigation must be performed under the direct supervision of a Radon
Professional, in accordance with the protocols referenced in this section.
ii.
Radon Certification/License of the Radon Professional is required as follows:
a. Certification from either the American Association of Radon Scientists and
Technologists (AARST) National Radon Proficiency Program (NRPP) or the National
Radon Safety Board (NRSB); and
b. Certification/License from the state in which the testing or mitigation work is being
conducted, if the state has this requirement.
c. Exceptions to Radon Report.
i.
A Radon Professional may conclude that neither testing nor mitigation is necessary based
on a physical inspection of the property, the characteristics of the buildings, and other
valid justifications. An example of a valid justification is having only a garage on the
surface level that is open to the air and is fully ventilated. Any such justifications as to
why neither testing nor mitigation is necessary must be provided in the Environmental
Report. Any waiver requests submitted for this section (9.5.C) must be made in
accordance with this exception. Requests for waiver of this section 9.5.C that do not meet
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the requirements of this exception will not be granted.
ii.
A radon report is not required for Section 223(f) project applications that have a low radon
risk. To determine whether the project’s radon risk is low, the lender must first establish
that the project is located Zone 3 of the EPA Map of Radon Zones (available at:
http://www.epa.gov/radon/zonemap.html ). Then the lender must consult any published
and readily available state or local radon potential data or maps to confirm the radon risk
is low. If such information indicates a low radon risk, the lender must provide appropriate
documentation.
iii.
A radon report is not required for applications that are categorically excluded under 24
CFR 50.19(b)(21) (see 9.1.A.5, above).
iv.
Applicants are encouraged to test for radon even if a radon report is not required per the
exceptions above. Any such testing must follow the testing protocols and resident
notification protocols below, and must then be incorporated within a radon report as
described within this section. If the results of such testing indicate levels of radon above
the threshold for unacceptability, mitigation as described in this section is required, with
the mitigation requirements for Section 223(a)(7) projects the same as those for 223(f)
projects.
d. Testing Protocols.
i.
Radon testing must follow the protocols set by the American Association of Radon
Scientists and Technologists, Protocol for Conducting Radon and Radon Decay Product
Measurements in Multifamily Buildings (ANSI-AARST MAMF-2012, Section III, or
similar section in the most recent addition) (available at http://aarst.org/bookstore.shtml).
Exception: With reference to Section III.3.1 of ANSI-AARST MAMF-2012, the
minimum number of areas to be tested shall be at least twenty-five percent of randomly
selected ground level units/rooms in each building. All of the other requirements at
Section III.3 of ANSI-AARST MAMF-2012, including upper floor testing, shall be
followed. Note that if less than one-hundred percent (100%) of ground level units/rooms
are tested and radon is found in one or more unit/room at or above threshold
requirements, then all ground level units/rooms must be mitigated.
ii.
Threshold for unacceptability: 4.0 picocuries per liter (4.0 pCi/L) based on initial and any
confirmatory testing, if performed.
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e. Occupant Notification.
i.
Testing. Occupants of all new applications for Multifamily MAP and TAP mortgage
insurance programs shall be informed of forthcoming testing in the manner described in
AARST MAMF-2012, Section II.B and Section III. 2.2.1.
ii.
Mitigation. Occupants shall be informed both prior to and after mitigation activities. In
the case of new construction, incoming occupants shall be informed of radon mitigation
activities.
f. Mitigation Standards. Radon resistant construction is required for all new construction, and
radon mitigation is required for existing construction where testing has revealed that radon
levels exceed the threshold for unacceptability. The Radon Professional must assure that radon
resistant construction or radon mitigation, when required, conforms to the following standards.
i.
Existing buildings:
a. Multifamily structures: ANSI-AARST RMS-MF 2014, Radon Mitigation Standards
for Multifamily Buildings (available at https://www.aarst.org/bookstore.shtml).
b. Single Family structures: ASTM E2121-13 (or most recent edition), Standard Practice
for Installing Radon Mitigation Systems in Existing Low-Rise Residential Buildings
(available at http://www.astm.org/Standards/E2121.htm).
ii.
New construction: ASTM E1465-08a, Standard Practice for Radon Control Options for
the Design and Construction of New Low-Rise Residential Buildings (available at
http://www.astm.org/Standards/E1465.htm).
g. Mitigation Timing. For new construction and substantial rehabilitation properties, all
mitigation, including follow-up testing, must be completed prior to Final Closing. Radon
mitigation included as part of a Section 223(f) project’s repairs must be completed as quickly
as practicable, and in any event, no later than 12 months after Closing.
h. Certificate of completion. A certificate of completion from the Radon Professional must be
submitted and appended to the radon report once radon testing and/or mitigation is completed.
i. Cost estimate. Use detailed plans and specifications supplied by the lender’s architectural
analyst as required by MAP Guide, Section 5.11, as a basis for the cost estimate. Estimates
must reflect the general level of construction costs in the locality where construction takes
place. Costs must be projected to the estimated construction start date.
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3. Section 223(f).
a. All Section 223(f) projects located within high risk (Radon Zone 1) and medium risk (Radon
Zone 2) zones must be tested for radon in accordance with 9.5.C.2.d, above.
i.
Testing must be performed no earlier than 1 year prior to application submission.
ii.
Exception: The applicant may elect to proceed directly to mitigation without testing.
b. Mitigation. See requirements at 9.5.C.2.f. If estimated costs exceed the allowable cost for the
Section 223(f) program, the application cannot be approved but may be considered under the
substantial rehabilitation program.
4. Substantial Rehabilitation and Conversions.
(Applies to all Radon Zones)
a. Testing prior to substantial rehabilitation or conversion.
i.
Early testing not feasible. For some proposals, such as a conversion of an existing building
from non-residential to residential, the building envelope may change to such an extent
that early testing would not be appropriate and in some cases not possible. If this is the
case, proceed directly to mitigation as discussed at Section 9.5.C.4.b.
ii.
Early testing when feasible.
a. Must be performed no earlier than 1 year prior to application submission in
accordance with 9.5.C.2.d.
b. If test results are below the threshold, no mitigation is required.
c. If test results are at or above the threshold, mitigation must be built into the project
design per Section 9.5.C.4.b.i.
b. Mitigation.
i.
If mitigation is built into project design, it must be conducted in accordance with the
requirements at 9.5.C.2.f.
ii.
If mitigation is not built into project design, after construction is complete but prior to
Final Closing, radon testing must be conducted. If testing results are above the threshold,
retrofit pursuant to the requirements at 9.5.C.2.f is required.
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5. New Construction.
a. Radon resistant construction is required for all radon zones.
b. Radon Zone 1:
i.
Construction Requirements: All new construction in Radon Zone 1 must meet all of the
requirements of ASTM E1465-08a for installation of passive systems.
ii.
Post-construction testing is required prior to Final Closing. If testing results are above the
threshold, conversion from a passive system to a fan-powered system is required.
c. Radon Zones 2 and 3:
i.
Construction requirements.
a. Gas permeable layer. The gas permeable layer must meet all of the requirements of
ASTM E1465-08a, Section 6.4.
b. Ground cover. The concrete slabs and plastic membranes that seal the top of the gas
permeable layer must meet all of the requirements of ASTM E 1465-08a, Section 6.2.
c. Foundation walls. Foundation walls must meet all of the requirements of ASTM
E1465-08a, Section 6.3.
ii.
Post construction testing is required, except as provided at 9.5 C.2.c.
a. Radon testing must be performed after construction is complete, but prior to Final
Closing.
b. If testing results are above the threshold, retrofit based on the applicable standard at
9.5.C.2.f is required, with installation of a passive system. If testing results remain
above threshold, a fan-powered system is required.
D. Historic Preservation (24 CFR 50.4(a)).
1. HUD must follow the procedures implementing the National Historic Preservation Act (54 U.S.C.
300101 et seq.) with regulations found at 36 CFR Part 800. Section 106 of the National Historic
Preservation Act (NHPA) requires Federal agencies to take into account the effects of their
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undertakings on historic properties and to afford the Advisory Council on Historic Preservation a
reasonable opportunity to comment.
2. Applications for Firm Commitment, whether for new construction, rehabilitation, refinancing or
conversion from non-residential to residential property are considered “federal undertakings”
which require HUD to make a determination of no historic properties affected, no adverse effect,
or adverse effect upon historic properties. An historic property means any prehistoric or historic
district, site, building, structure, object, or traditional property or landscape included in, or eligible
for inclusion in, the National Register of Historic Places maintained by the Secretary of the
Interior. Also, HUD must consider the area of potential effect (APE), which is often the site
boundary, but occasionally the block on which the site is located or the immediate site environs.
Exceptions (if applicable, a statement identifying the exception and supporting documentation
must be included in the application):
a. Categorical exclusions under 24 CFR 50.19(b)(21) (see 9.1.A.4, above);
b. HUD has made the determination that 223(f) refinance transactions that will not allow
rehabilitation nor result in any physical impacts or changes except for routine maintenance
have “no potential to cause effects” to historic properties, as described in 36 CFR 800.3(a)(1),
and therefore have no further obligations under Section 106 of the Historic Preservation Act or
36 CFR Part 800. For such transactions, the lender is not required to contact the State Historic
Preservation Officer (SHPO), and HUD staff historic preservation responsibilities are limited
to documenting this determination in the form HUD-4128;
c. Some states may have a Programmatic Agreement (PA) with HUD and the proposal may be
part of a class of actions that do not require Section 106 consultation under the PA.
3. Pursuant to the “anticipatory demolition” requirements of Section 110(k) of the National Historic
Preservation Act (54 U.S.C. 306113), even before the concept meeting or application submission
takes place, any action by a potential lender or borrower, or any action by another party that the
lender or borrower has the legal power to prevent, that is taken with the intent to circumvent
Section 106 review and that significantly adversely affects a historic property, could result in
rejection of an application.
4. If an exception does not apply, HUD must review the project and make a finding of effect. The
lender may assist HUD in making its historic preservation determinations by submitting a
preliminary letter to the appropriate SHPO consisting of a narrative explaining the proposal, and
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following the procedures outlined by the individual SHPO office. The letter must include a
description of the proposed site activities, a map identifying the site location, the APE, and a
preliminary opinion as to whether the proposal would have any effect on historic properties. The
letter, any referenced documentation, and the SHPO response, if any, must be included in the
environmental report. Lenders may obtain from the HUD office the name and address of the
SHPO who has the right to comment on the proposal. If a response from the SHPO is not received
within 30 days, the lender must alert HUD of this fact in their application. Some SHPOs will only
respond to Federal agencies. Note that HUD, not the lender, is responsible for contacting the Tribal
Historic Preservation Officer (THPO) and any affected tribes (see 36 CFR 800.2 and 800.3). The
information contained in the letter that was submitted to the SHPO as described above will assist
HUD in carrying out its tribal and THPO consultations.
5. Because of the technical nature of historic property identification, evaluation and treatment, it may
be appropriate to retain a qualified historic preservation professional to prepare the letter. Such
consultant should meet the Secretary of the Interior’s Professional Qualifications (36 CFR Part 61)
and have experience in Section 106 reviews. Examples of when retention of a qualified historic
preservation professional may be appropriate include when National Register eligibility of a
property is unclear, when adverse effects are expected, when the property contains archeological
sites, and/or when the project is controversial.
6. After a SHPO response has been received or 30 days have elapsed, the lender provides the
response to HUD and HUD must make a final determination of effect. HUD will review the SHPO
letter and other information for sufficiency, invite consulting party participation as appropriate,
and if appropriate may request additional information or engage in further consultation with the
SHPO. If HUD determines there is that there are no Historic Properties Affected by the project, it
will notify the SHPO/THPO. If the SHPO/THPO (or the Advisory Council for Historic
Preservation, if it enters the Section 106 process) does not object within 30 days, a commitment
may be issued. Where an undertaking will affect a historic property or historic district, HUD will
direct the consultation process, which may result in a design change, research and preservation,
salvage, or in rare cases, rejection of the application for Firm Commitment. Consultation may take
considerable time, and must occur before a commitment can be issued.
7. Tribal Consultation:
a. When Section 106 consultation is required, consultation with federally recognized Indian tribes
and Native Hawaiian Organizations may be required. Not all projects that require Section 106
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review require consultation with Indian tribes. Consultation with federally-recognized tribes is
only required when a project includes activities that have the potential to affect historic
properties of religious and cultural significance to tribes. These types of activities include:
i.
ground disturbance (digging),
ii.
new construction in undeveloped natural areas,
iii.
introduction of incongruent visual, audible, or atmospheric changes,
iv.
work on a building or structure with significant tribal association, or
v.
transfer, lease or sale of historic properties of religious and cultural significance.
b. When tribal consultation is required, the HUD reviewer will utilize the HUD Tribal Directory
Assessment Tool (http://egis.hud.gov/tdat/Tribal.aspx) during the environmental review
process to determine if the site is located in an area of tribal significance. The tribal
consultation requirement applies to properties off tribal lands as well as on tribal lands.
Properties with religious and cultural significance to native people may include ancestral
archaeological sites and natural areas where traditional practices or ceremonies have been
carried out as well as more familiar historic properties. Some traditionally used places have
very strong religious associations, and it may be difficult or even inappropriate for native
people to talk about their significance. If this situation arises, hiring a qualified professional
with experience in tribal consultation may be required. The cost of such an interpreter shall be
paid by the borrower.
8. The Section 106 review must be completed before HUD approves and/or commits funds to a
project. Additional guidance on historic consultation is available at:
https://www.hudexchange.info/programs/environmental-review/historic-preservation
http://www.achp.gov/work106.html.
and
9. The cost of historic preservation mitigation may be included in the proposed mortgage loan.
E. Floodplain Management and Flood Insurance (24 CFR 50.4(b)(1) and (2))
1. Applications for Firm Commitment are subject to regulations regarding floodplain management
found at 24 CFR Part 55 which implements Executive Order 11988 (Floodplain Management).
The lender must utilize the Federal Emergency Management Agency’s best available data to
comply with Floodplain Management requirements, which is typically the latest issued Advisory
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Base Flood Elevations (ABFEs), Preliminary Flood Insurance Rate Maps (P-FIRMs), or Flood
Insurance Rate Maps (FIRMs) so long as the ABFE or P-FIRM does not have a lower elevation
requirement than the enacted FIRM. The relevant Flood Insurance Rate Map (FIRM) may be
found on line at: www.msc.fema.gov . An on line resource for checking ABFEs in Region 2 can
be found at: http://www.region2coastal.com/sandy/abfe. If any part of the site or integral offsite
development (i.e., ingress, egress and/or parking) is located within the 100-year floodplain (1%
chance of annual flood, known as the Special Flood Hazard Area) or within a 500-year floodplain
(0.2% chance of annual flood) for critical actions, according to the best available data, the project
must comply with HUD’s floodplain management regulations.
2. An application for mortgage insurance shall not be approved for a property located in: (a) a
floodway; (b) a coastal high hazard area (generally listed as “V” zones on Flood Insurance Rate
Maps); or (c) a FEMA identified special flood hazard area in which the community has been
suspended from or does not participate in the National Flood Insurance Program. The terms
“critical action,” “coastal high hazard area,” “floodway,” and “functionally dependent use” are
defined at 24 CFR 55.2. If a stream coursing through a proposed site is designated as being in the
100-year floodplain according to FEMA’s best available data, but there is no designated floodway
area (a so-called “regulatory floodway”), development will be prohibited in the channel of the
stream.
Exceptions:
a. 24 CFR 55.12 lists categories of proposed actions for which the floodplain management
requirements in 24 CFR 55 are not applicable. The floodway and coastal high hazard area
prohibitions do not apply if only an incidental portion of the project is in the 100-year
floodplain, or for critical actions, the 500-year floodplain, and certain conditions are met (see
24 CFR 55.12(c)(7). HUD does not consider improvements to be incidental.
b. When invoking the incidental portion exception at 24 CFR 55.12(c)(7), a protective covenant
or comparable restriction must be placed on the property’s continued use to preserve the
floodplain. The covenant or comparable restriction must run with the land to provide for
permanent preservation of the floodplain. A restriction that is contained in a document that
would expire at the conclusion of the HUD-insured mortgage does not meet the requirement
for permanent preservation of the floodplain.
In considering the safety of the residents, offsite floodways and other flood hazards will be
evaluated in terms of separation distance, elevation differences, and the nature of the hazard in
question. Unacceptable proximity to hazards may result in rejection of the application.
c. Refinances of currently HUD-insured mortgages are exempt from the 24 CFR Part 55 when the
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refinance will not result in any physical impacts or changes except for routine maintenance
under 24 CFR 50.19(b)(21). However, the flood insurance requirements specified at 24 CFR
50.4(b)(1) are still applicable.
3. Projects that are converting from a non-residential to a residential use are considered the same as
“new construction” for floodplain management
4.
New construction and substantial improvement, as defined at 24 CFR 55.2(b)(10), in mapped 100year floodplains is strongly discouraged. This flood buffer zone is extended to the 500-year
floodplain for proposed rehabilitation, refinancing, or new construction for facilities housing or
serving mobility-impaired individuals, a critical use. Such sites in the applicable floodplain
according to the best available data will not be considered for mortgage insurance unless one of the
following steps is taken:
a. A Conditional Letter of Map Amendment (CLOMA) or of Map Revision (CLOMR) removing
the entire site from the applicable floodplain has been obtained from FEMA prior to
submission of the pre-application or, in the absence of a pre-application, prior to submission
of the application for Firm Commitment. If the borrower has a CLOMA or CLOMR, HUD
approval for a Firm Commitment will be conditioned on the borrower: (1) meeting the
requirements of the CLOMA or CLOMR; (2) obtaining a Final Letter of Map Amendment
(FLOMA) or MAP Revision (FLOMR) removing the entire site from the applicable
floodplain prior to Final Endorsement; and, (3) maintaining flood insurance on any building
during the construction period until the FLOMA or FLOMR is issued; or
b. If Section 9.5.E.4.a does not apply, HUD must determine if there may be extraordinary
circumstances which lead to the conclusion that there are no practicable alternatives to the
project site being in the floodplain. In order to make this determination, HUD must conduct
an 8-step decision making process which includes publishing two public notices and taking
comments, as summarized in 24 CFR 55.20. Prior to issuing the first public notice, HUD will
require detailed information about how the property will be altered and improvements
designed. This information includes the elevation of the property, the elevation of the
floodplain, and the location of life support systems.
i. Except in circumstances where it would not be practicable, in order to minimize adverse
impacts, the 8-step process shall require as a condition of any project approval that a
CLOMA or CLOMR be issued prior to initial endorsement, a FLOMA or FLOMR be
issued prior to Final Endorsement, and flood insurance be maintained on any building
during the construction period until the issuance of the FLOMA or FLOMR.
ii. The 8-step process shall require that the lowest floor of new construction be elevated at or
above the Base Flood Elevation of the applicable floodplain based on the best available
FEMA data, plus one foot of freeboard. However, in no event shall the lowest floor be
below the Base Flood Elevation on the current adopted Flood Insurance Rate Map.
iii. The 8-step process requires that all “critical actions” as defined in 24 CFR 55.2(b) (3)
must comply with the requirements of 24 CFR 55.20(e).
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iv. Instead of elevating non-residential or mixed use structures that are not critical actions,
the project may be designed and constructed such that below the flood level, the structure
is non-residential and flood proofed to the level of the best available flood data plus one
foot. Flood proofing requires structures to be water tight with walls substantially
impermeable to the passage of water and with structural components having the
capability of resisting hydrostatic loads, hydrodynamic loads, the effects of buoyancy, or
higher standards required by the FEMA National Flood Insurance Program as well as
state and locally adopted codes.
v. The 8-step process shall be completed by HUD before issuance of the Firm Commitment.
HUD will develop the two notices, but the costs of publication will be borne by the
borrower.
5. For purchase or refinancing actions described in 24 CFR 55.12(a)(2) or repair, rehabilitation,
modernization or improvement actions described in 24 CFR 55.12(a)(3), an abbreviated process
pursuant to 24 CFR 55.12(a) may be used by the Hub or PC to determine their acceptability.
Detailed information about the proposed actions, and about any plans for mitigation, must be
submitted an application phase. HUD will evaluate risks and mitigation measures in making its
decision. HUD discourages these actions if the lowest floor and/or the life support facilities, or
egress and ingress of the existing building, are more than 12 inches below the 100-year floodplain
line. The abbreviated review process shall be completed by HUD before issuance of the Firm
Commitment.
6. Where a site does not appear to be located in the floodplain on official FEMA maps, but shows
evidence of flooding or has a history of flooding, HUD is not precluded from qualitatively
evaluating the acceptability of the site. Lenders will be required to provide extensive data to aid
HUD in evaluating previously flooded or floodplain sites.
7. Any building accepted that is located within a FEMA mapped special flood hazard area is required
to carry flood insurance under the National Flood Insurance Program for the term of the loan, in an
amount at least equal to the least of the development or project cost less estimated land value, the
outstanding principal balance of the loan, or the maximum available coverage. At the time of
Application for Firm Commitment, the lender must submit a completed Standard Flood Hazard
Determination Form with proof that the new mortgagor has a commitment for flood insurance
effective as of loan closing. All new and renewal leases must contain acknowledgements signed by
residents indicating that they have been advised that the property is in a floodplain and flood
insurance is available for their personal property for sites within the 100-year floodplain and
critical actions within the 500-year floodplain.
8. The cost of floodplain mitigation may be included in the proposed mortgage loan.
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Wetlands Protection (24 CFR 50.4(b)(3))
1. Applications for Firm Commitment for new construction are subject to regulations regarding
wetlands at 24 CFR Part 55, which implement Executive Order (EO) 11990 “Protection of
Wetlands”. EO 11990 prohibits the development or disturbance of wetlands and proposals
impacting wetlands unless there is no practicable alternative and the proposed action includes all
practicable measures to minimize harm to the wetland. Proposals impacting wetlands must be
reviewed by HUD to determine compliance with HUD wetland protection policy. Wetlands
include those identified on the National Wetland Inventory maintained by the U.S. Fish and
Wildlife Service.
2. Extensive data must be provided in the Environmental Report to aid HUD in evaluating wetland
impacts and the lender should consult early with the field office on any application for Firm
Commitment on a site that impacts wetlands. HUD may require that the lender submit a wetlands
delineation performed by a qualified professional to evaluate the direct and/or indirect wetland
impacts of the project. Appropriate and practicable compensatory mitigation is recommended for
unavoidable adverse impacts to more than one acre of wetlands. Compensatory mitigation
includes, but is not limited to: permitee-responsible mitigation, mitigation banking, in-lieu fee
mitigation, the use of preservation easements or protective covenants, and any form of mitigation
promoted by state or Federal agencies.
3. New construction projects on land listed in the inventory will be considered only after HUD
conducts an 8-step decision-making process which is the same as used for the flood plain process
and includes consultation, issuing two public notices and taking public comment. Wetlands under
local or state jurisdiction are subject to state or local review as appropriate. However, compliance
with state or local requirements is not a substitute for the eight-step process.
4. Only in rare cases will rehabilitation, purchase and refinancing proposals be permitted to involve
wetlands impacts.
G.
Endangered Species (24 CFR 50.4(e))
1. Under Section 7 of the Endangered Species Act, HUD must consult with the U.S. Fish and Wildlife
Service or the National Marine Fisheries Service (the Services) whenever a proposal may affect an
endangered or threatened species or its habitat. A required consultation should be assumed for any
site within the critical habitat (as defined in 50 CFR Part 17 and Part 226) of a listed species;
consultation may also be required even if no critical habitat is present.
2. In areas where impacts on endangered or threatened species are a concern, all appropriate
information regarding possible impacts of the project should be provided to HUD as early as
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possible. The Environmental Report should include review of published information, including but
not limited to information on the Services websites regarding the possible presence and associated
critical habitat of any listed species in the vicinity of the proposal and provide HUD with the
results of the research. Furthermore, if a proposal is in an area of potential impacts on a listed
species or its critical habitat, any possible associated impacts caused by the proposal should be
discussed in the Environmental Report. The lender and/or Environmental Report preparer should
not contact the Services directly.
3. If the project activity could affect an endangered/threatened species or its habitat, HUD must make
a determination of effect. HUD must seek concurrence of the Services on any “may affect, not
likely to affect” determination and associated mitigation measures. HUD must initiate formal
consultation under Section 7 of the Endangered Species Act for a “may affect, likely to adversely
affect” determination. The lender may be required to obtain special studies such as habitat
assessments, surveys or biological assessments at the borrower’s cost.
4. Consultation under Section 7 of the Endangered Species Act may result in more stringent
conservation measures than would otherwise be imposed. The Regional staff can advise the lender
where information on endangered species may be obtained.
5. The cost of mitigation to accommodate endangered species would likely be deducted from the
warranted price of the land as an unusual site condition.
H.
Noise (24 CFR Part 51, Subpart B)
1. HUD standards regarding the acceptability of noise impacts on residential property are found at 24
CFR Part 51 Subpart B, which standards must be met for new construction and conversion from
nonresidential to residential projects. Where threshold criteria are met or exceeded for new
construction or major/substantial rehabilitation, a noise analysis utilizing the methodology in
HUD’s Noise Guidebook (HUD- 953-CPD) will be performed by HUD as part of HUD’s NEPA
environmental assessment. The Regional staff should be consulted prior to attempting to design
mitigation measures.
2. New construction or conversions of existing structures to residential housing in the Unacceptable
Noise Zone, where outdoor noise levels are above 75 dB, are generally prohibited. If the Regional
Office wants to consider such a proposal, it must:
a.
Prepare an Environmental Impact Statement (EIS). If the Regional Office believes that the
proposal is acceptable based on the EIS, it must then obtain project approval, including
approval of noise mitigation measures, from the Assistant Secretary for Community
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Planning and Development but must also obtain project approval, including approval of
noise mitigation measures, from the Assistant Secretary.
b.
If the Regional Office determines that noise is the only environmental issue and no outdoor
noise sensitive activity that is not mitigated to below HUD’s 65-decibel standard will take
place on the site, it may request a waiver of the EIS Requirement by the Assistant Secretary
for Community Planning and Development but must also obtain project approval, including
approval of noise mitigation measures, from the Assistant Secretary
3. Noise analysis and attenuation of refinance applications is required by 24 CFR Part 51 if the
repairs or renovation will convert the building to residential. For rehabilitation projects that do
not require noise attenuation, HUD will encourage appropriate noise attenuation measures for
inclusion in the property alteration. For all other projects, noise exposure by itself will not result in
the rejection of existing properties for insurance, but is a marketability factor that HUD will
consider in determining if the amount of any insurance or other assistance that may be given.
I.
Explosive/Combustible/Flammable Hazards (24 CFR Part 51 Subpart C).
HUD will not insure a property where structures and residents will be exposed to unacceptable
risks posed by proximity to explosive or flammable hazards. This means that for new construction
projects, and rehabilitation projects where unit density is increased or where there is a conversion
from non-residential to residential or where a vacant building is made habitable, there must be an
Acceptable Separation Distance (ASD) away from aboveground storage facilities with explosive,
combustible, or flammable material contents and similar industrial facilities. HUD standards
regarding proximity to explosive or flammable hazards are found at 24 CFR Part 51 Subpart C.
Analysis of sites near or in the vicinity of these types of facilities must be performed by HUD as
part of the NEPA environmental assessment in accordance with the HUD guidebook: “Siting
Acceptable Separation Distance” (HUD-1060-CPD)”. If a plan is agreed upon with HUD before
the invitation letter, these hazards may be mitigated during the construction period, if the work can
be done on the subject property. For projects to be purchased or refinanced, HUD will
substantively evaluate the risks associated with proximity to hazardous facilities.
J.
Coastal Barriers (24 CFR 50.4(c)(1)).
Under the Coastal Barriers Resources Act, HUD is prohibited from insuring a project located
within designated coastal barriers of the Atlantic Ocean, Gulf of Mexico, or the Great Lakes,
known as Coastal Barrier Resource System (CBRS) units and shown on associated Fish and
Wildlife Service maps. A project located within a CBRS unit or that includes a facility (such as a
water main) leading to a CBRS unit will not be eligible for application processing.
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Coastal Zone Management (24 CFR 50.4(c)(2)).
Projects located within a state’s coastal management zone must be determined to be consistent
with the approved state Coastal Zone Management program. In many states, HUD will require a
letter from the State Coastal Zone Management Agency confirming consistency with the approved
program. Mortgagees should be aware of the extent of coastal management zones in coastal states
and contact the field office early when examining a proposal in a coastal zone.
L.
Sole Source Aquifers (24 CFR 50.4(d)).
An aquifer is an underground body of water usually kept in place by rock, gravel, or sand. New
construction and some rehabilitation projects located within the boundaries of the recharge area of
a designated sole source aquifer must be reviewed by EPA for their potential to contaminate the
sole source aquifer. HUD offices will identify the local, state or Federal agency with maps of
sole source aquifers.
M.
Runway Clear Zone, Runway Protection Zones, Clear Zone, or Accident Potential Zone (24 CFR
Part 51 Subpart D).
1. HUD standards regarding the acceptability of property located in Runway Clear Zones (also
known as Runway Protection Zones), Clear Zones, and Accident Potential Zones are found at 24
CFR Part 51 Subpart D. An Accident Potential Zone is an area at military airfields that is beyond
the Clear Zone.
2. Construction or major rehabilitation of any property located within a Clear Zone is prohibited.
Acquisition, and refinance of projects within Clear Zones are allowed with some restrictions.
HUD must determine that projects located in Accident Potential Zones are generally consistent
with Department of Defense land use compatibility guidelines for Accident Potential Zones.
3. HUD, as part of its environmental review for an existing property, shall advise the lender who will
advise the mortgagor purchasing the property that the property is in a Runway Clear Zone, Clear
Zone, and what the implications of such a location are. The mortgagor purchasing the property
must sign a statement acknowledging receipt of this information. HUD may reject applications for
existing properties within a Runway Clear Zone or Clear Zone because of the possibility that the
property may be acquired at that later date by the airport operator.
N. Environmental Justice (24 CFR 50.4(l)).
HUD will determine whether EO 12898, Federal Actions to Address Environmental Justice in
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Minority Populations and Low Income Populations, is applicable to the project. This EO requires
that federal actions not result in disproportionately high and adverse health or environmental
effects on minority or low-income populations. When a project impacts a minority or low-income
population, or when siting of a project raises questions of discrimination, HUD will perform the
necessary analysis before determining the acceptability of the project. A project that will receive a
Low Income Housing Tax Credit and has environmental impacts is a clear example of when
environmental justice concerns should be evaluated. HUD will advise the lender of any
Environmental Justice concerns including recommendations on their resolution. In most cases the
preferred resolution would be to modify the project to eliminate or at least reduce the adverse
effects, when feasible.
O.
Other Federal or State Laws.
1. Applications for Firm Commitment are subject to provisions of other Federal authorities which
seldom require action on the part of HUD, including the Wild and Scenic Rivers Act, Farmland
Protection Policy Act, and the Clean Air Act. Certain State regulations also implement air quality
requirements. HUD will advise the lender if any actions under these or other Federal or State
authorities are required.
2. HUD may require mitigation of a variety of additional nuisances and hazards on the property
which would affect the health and safety of residents and the security of the collateral.
P.
Commonly found or Observed Additional Nuisances and Hazards (applicable to all transaction
types except those categorically excluded from all environmental review, as discussed at 9.1A.5
above).
1.
Reference for equations and methodology to calculate acceptable separation from high pressure
pipelines transferring flammable and combustible liquids and gases is the Final report from ICF
International, September 17, 2012, “Research to Support U.S. Department of Housing and Urban
Development Regulation 24 CFR Part 51 Subpart C, Siting of HUD-Assisted Projects Near
Hazardous Operations Handling Conventional Fuels or Chemicals of an Explosive or Flammable
Nature.”
2. No structure may be located within the easement of any overhead high voltage transmission line.
Structures must also be located outside the engineered fall distance of any support structure for
high voltage transmission lines, radio antennae, satellite towers, cellular towers, etc. This does not
apply to local service electric lines and poles. As such, if a structure is within the distance equal to
the height of a support structure, an engineering report that evaluates the support structure’s
engineered fall distance is required. The engineered fall distance must be calculated by a registered
professional engineer.
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3. HUD requirements for oil or gas wells, sour gas wells and slush pits:
a. Operating or planned drilling site: No residential structures may be within 300 feet of the
boundary of the drilling site.
b. Operating well: No residential structures may be within 75 feet of an operating well, unless the
following mitigating measures are taken:
i.
Controls on nuisances;
ii.
Controls on noise caused by pumping; and
iii.
Spill controls to reduce risk of contamination.
c. Abandoned wells.
i.
Confirmation by the State government that the well is safely and permanently abandoned
and no residential structures are within 10 feet must be obtained.
ii.
If there is no confirmation letter, no residential structures may be located within 300 feet
of an abandoned well.
d. Sour gas (hydrogen sulfide bi-product) wells: Separation distance must be determined by a
Petroleum Engineer, with concurrence by State government.
e. Slush pits (used for drilling mud mixes for well lubrication):
i.
If on-site, hazards analysis is required to be performed pursuant to Section 9.3 above.
Mitigation must include, but not necessarily be limited to, removal of all drilling mud
from the site and backfilling with clean compacted material.
ii.
If offsite, hazards analysis must be performed pursuant to Section 9.3.
4. If any part of a site is to be developed on filled ground, HUD may require that all grading be
properly controlled to prevent differential earth movement, sliding, erosion, and/or other
occurrences which might damage dwellings, streets or other improvements. Excessive slopes, soil
compatibility, and potential for erosion, are important site planning factors that impact the cost of
development and the ultimate success of the project.
5. Regional Centers or Satellite Offices may adopt additional requirements to address unique local
concerns, but, if any local requirement is mandated, the Regional Office must inform the Deputy
Assistant Secretary for Multifamily Housing and the HUD Headquarters Housing Environmental
Clearance Officer of the requirement and its rationale.
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When an environmental assessment level of review is required, HUD will require and analyze
information to determine if the project results in any significant impact based on land development,
socioeconomic factors, community facilities and services, and natural features. HUD will determine if
an environmental impact statement is needed. Specific environmental assessment areas that will be
considered include, but are not limited to:
a. Conformance with comprehensive plans, zoning compatibility, site safety, energy
consumption, and urban impact.
b. An assessment of services like educational facilities, commercial facilities, health care and
social services.
c. Availability of supporting infrastructure such as solid waste, wastewater, storm water, and
access to municipal water supply, public safety (Police, Fire, and Emergency Medical
Services), open space and recreation, cultural facilities, and transportation.
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Management Analysis
10.1
Introduction
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Chapter 10
Management Analysis
10.1
Introduction
A. Management agents that operate insured multifamily properties play a key role in providing quality
housing. While it is the ultimate responsibility of the project owner/mortgagor to select and oversee
the management agent of an insured property, the establishment of an effective relationship among
HUD, the owner, and the management agent is critical to the success of the property over the life of
the mortgage. The management agreement and related documents must be submitted with the Firm
Commitment application or can be submitted at the pre-application stage if the management agent has
been identified at that stage.
B. The lender must review whether the proposed management agent demonstrates the qualifications,
capability and experience to assure that the property will be managed in a prudent, efficient, and costeffective manner and in accordance with all HUD requirements. Documentation submitted by the
lender in support of the choice of management agent must demonstrate that the agent:
1. Is eligible for approval and is in good standing with HUD. HUD may condition its approval of the
management agent upon the resolution of referrals with HUD’s Departmental Enforcement Center
(DEC) that relate to the management agent, particularly as those referrals may relate to the Project;
2. Demonstrates effective management experience and acceptable operating procedures
commensurate with the type of project;
3. Has adequate fidelity bond coverage;
4. Is in compliance with all state and local laws, regulations and requirements; and
5. Is able to positively communicate and cooperate with legitimate resident associations.
10.2
Exhibits Required for Firm Commitment
A. Exhibits.
1. Evidence of Previous Participation Review. Participants are permitted to submit to HUD their
Previous Participation Review submission package for electronic review (currently via Active
Partners Performance System (“APPS”)) or by paper (currently form HUD-2530) as early as the
pre-application processing stage for all principals and affiliates of the management agent.
2 HUD-9832, Management Entity Profile for the Agent. This form provides detailed information
regarding the organization, operation, and experience of the proposed management agent. The
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management plan should provide a narrative overview and should include any pertinent leasing or
management strategies that are not covered in Form HUD-9832.
3. HUD-9839 A, B, or C - Owner’s/Management Agent’s Certification, as appropriate. In this
document, the agent and owner must certify that HUD requirements and contract obligations will
be complied with, and that an acceptable Management Agreement will be executed. The agent and
owner must certify that no payments have been made to the owner in return for awarding the
management contract to the agent, and that no such payments will be made in the future.
4. Proposed Staffing for the Project. Information is required regarding the job-titles, duties, and
salaries of all employees of the management agent who will work at the project which will be
reviewed to determine if the number, salaries, and duties of the proposed staff is reasonable and
adequate for the size and type of the proposed project. If there is a non-customary situation or
arrangement, resulting in the need for more or less staff than usual, an explanation of this must be
provided.
5. Resident Complaints Resolution Procedure. Provide a description of the procedure used by the agent
to resolve resident complaints, as well as examples of how the system has been implemented.
6. Management Agreement, if Applicable. Projects with identity-of-interest management agents or
independent fee management agents must execute a Management Agreement. An agreement is
recommended, but not required, for owner-managed projects or projects managed by a project
administrator.
7. Marketing, Leasing, and (if applicable) Relocation Plan.
a. All projects which require absorption of units at economic rents to achieve break-even
occupancy must submit a detailed marketing and leasing plan and budget that has been
reviewed and confirmed by the proposed management agent. The plan must discuss when
marketing efforts will begin, when the leasing office and model units will be opened, how the
leasing office will be staffed, and the project’s marketing and advertising strategy. The plan
must address timing of the construction progress schedule with respect to egress and ingress
into the project, landscaping, and access to amenities. These items are in addition to those
required by the Affirmative Fair Housing Marketing Plan.
b. For substantial rehabilitation projects involving temporary relocation or displacement of
existing residents, the plan must address details of timing, funding and management of the
relocation process.
c. The lender’s underwriter, the field office team leader and the Asset Management staff should
review the marketing plan.
Although not required, the lender may retain a third party
property management or leasing consultant to review such plans for large or complex deals or
where the proposed property manager is not fully experienced.
8. Affirmative Fair Housing Marketing Plan, Form HUD-935.2A, if applicable. See Section 10.9 for
more detail.
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9. Additional Information Required by the Field Office. It may be necessary to provide the field
office with additional information so that a determination of the acceptability of the proposed
management agent can be made.
10.3
Lender Review of Management Documents
As part of the Firm Commitment application package, the lender must provide documentation to
demonstrate the acceptability of the proposed management agent, with the Management Entity Profile of
particular importance. The lender must review the qualifications of the proposed agent to assess its ability
to manage the project effectively and in compliance with HUD requirements, and must consider each of
the following factors:
A. Past and Current Management
1. The lender must review the proposed agent’s past experience and current performance with respect
to the following indicators:
a. Experience with projects similar in size and configuration to the subject
b. Billing practices
c. Controlling operating expenses
d. Vacancy rates
e. Resident turnover
f. Rent collection and accounts receivable
g. Physical security
h. Physical condition and maintenance
i. Financial reporting
j. Resident relations
k. Resident income certification, record keeping and reporting if an affordable or subsidized
project
l. Appropriate applicant outreach and affirmative marketing in accordance with a HUD-approved
AFHMP
m. Tenant selection in accordance with Fair Housing principles
2. If problems are identified with any of these indicators, the lender must assess whether the agent
has adequately improved its procedures to prevent the recurrence of such problems or whether
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management initiatives by the agent and owner are sufficient to correct the problems and their
causes.
B. Ability to Manage Troubled Projects.
If the property has physical, financial or social problems that require special expertise or skills to
manage effectively, the lender must determine whether the agent has the necessary skills and expertise
and whether the agent’s proposed remedies for these problems are appropriate. Agents proposed for
these projects should have prior experience successfully addressing similar issues.
C. Management Qualifications.
The proposed management agent should have at least one senior staff person who drafts the agent’s
policies and supervises project operations with the following qualifications:
1. A professional designation in housing management from a national organization that provides such
accreditation; and
2. A minimum of 5 years of experience in directing and overseeing the management of multifamily
projects serving a similar resident clientele.
The lender may accept a proposed agent without the experience requirements listed in this section if the agent
is satisfactorily managing other insured or subsidized projects.
D. Past Performance with Identity-of-Interest Contractors.
If the management agent purchases goods or services from identity-of-interest companies and has
previously managed insured projects, the lender must assess the agent’s past use of such companies
and whether this use resulted in costs to the project that exceed the prices paid in arms–length
transactions. The review should especially consider:
1. Goods and services purchased through any “pass-through” arrangements described in item 11(b) of
the Management Entity Profile.
2. Evidence that the agent has compared prices and that the use of any identity-of-interest companies
or pass-through arrangements has been more advantageous to the project than purchasing through
arms-length transactions would have been.
3. Evidence that the management agent followed HUD contracting and hiring guidelines.
E. The lender can utilize the following additional sources to determine the capability and expertise of the
proposed management agent:
1. Management Entity Profile. The lender can use the information listed on the form to solicit
opinions from HUD offices that have worked with this agent.
2. Performance Evaluations for the proposed agent and projects which the agent has managed or is
currently managing if those projects are under Flexible Subsidy contracts or Workout Agreements.
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3. Monthly and Annual Financial Statements of the Project including the Independent Public Auditor
(IPA) Internal Controls Questionnaire.
4. Additional documentation that the lender may review includes:
a. HUD/mortgagee on-site review reports;
b. Correspondence;
c. Resident complaint files;
d. Previous management reviews;
e.
Previous REAC inspections/scores, and
f. Reviews from federal, state or local government agencies of the management agent’s past
experience with properties using affordable housing or subsidy programs, if applicable.
10.4
HUD Asset Management Review
Asset Management Firm Commitment reviews will be assigned by the Chief, Account Executive
Branch.
The Account Executive will review the various management documents and application exhibits, and
advise the HUD Underwriter of their conclusions and recommendations.
The HUD Underwriter will provide the Account Executive with the data necessary for Asset
Management to rate the asset once a Firm Commitment is issued.
The HUD Underwriter, Account Executive, and Closing Coordinator will coordinate as needed and
appropriate to ensure that Firm Commitment special conditions are met, and timely review of closing
documents, turnover of files, and post-closing monitoring.
10.5
Review of Previous Participation
A. APPS was developed to automate the previous participation review process (currently paper Form
HUD-2530). If the management agent makes a submission in APPS, select Property submission
reason as: "Application for Mortgage Insurance" with role as “Management Agent.” Use of the APPS
system requires that all participants must register in the Business Partner Registration System
(BPRS).
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B. While performing a previous participation review, HUD staff will check for all non-compliance issues
based on previous participation records and other relevant information in HUD database or from other
sources. In addition:
1. Notwithstanding the issuance of the Commitment, previous participation approval of the
management agent must be obtained prior to and as a condition of Initial Endorsement.
2. Firm Commitments may only be issued with a condition when the commitment processing is
otherwise completed and all principals of the management agent are determined to be acceptable.
10.6
Bonding Requirements for Agents
The lender must determine that the agent has adequate bonding to provide a basic level of protection for
the multifamily project assets.
A. The management agent must certify in the Management Certification that it carries fidelity bond or
employee dishonesty coverage for:
1. All principals of the management entity; and
2. All persons who participate directly or indirectly in the management and maintenance of the
project and its assets, accounts, and records.
B. The fidelity bond or coverage must name the mortgagee and HUD as additional loss payees.
C. Coverage may be through one or more bonds, and one bond may cover more than one project,
including projects whose mortgages are not insured or held by HUD. The agent’s principals and
supervisory and front-line staff may be covered under the same bond.
D. Each project must be bonded for at least the value of two months’ gross potential income for the
project. If a bond covers more than one project, this minimum must be computed using the project
with the highest gross potential income.
10.7
Management Agreement Requirements
A. Applicability. Projects with identity-of-interest agents or independent fee agents must execute a
Management Agreement. An Agreement is recommended, but not required, for owner-managed
projects or projects managed by a project administrator.
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B. Required contents. The owner and agent may negotiate their own form of agreement provided that it
contains language which meets the following requirements:
1. Scope of services. All management agreements must describe the services the agent is responsible
for performing and for which the management fee will be paid.
2. Required clauses. All agreements must provide that:
a. Management fees will be computed and paid according to HUD requirements.
b. HUD may require the owner to terminate the agreement:
1) Immediately without penalty if an event of default occurs under the Security Instrument,
Note or Regulatory Agreement; or
2) Upon 30 days written notice, for failure to comply with the provisions of the Management
Certification or for other good cause; or
3) When HUD takes over the property as Mortgagee in Possession.
NOTE: The management agreement must always give the owner the ability to terminate
the contract for cause, with no more than a 30 day notice period.
c. If HUD terminates the agreement pursuant to its authority under the loan documents (HUD92466M, Regulatory Agreement provision 21), the owner will promptly make arrangements
for obtaining an alternative management agent that is satisfactory to HUD.
d. HUD’s rights and requirements will prevail in the event of any conflicts with the terms of the
management agreement.
e. The management agent must turn over to the owner all of the project’s cash, accounts,
deposits, investments, and records immediately, but in no event no longer than 30 days after
the date the management agreement is terminated.
3. Prohibited “hold harmless” clause. Management Agreements cannot exempt the agent from
liability for damages, injuries and losses. This includes all “hold harmless” provisions, such as
parties holding each other harmless except in the case of willful misconduct/ gross negligence.
Allowing a management agent to be held harmless for all breaches of the standard of care less than
willful misconduct/ gross negligent is against HUD policy (such an exemption would allow a
management agent to be held harmless for negligence).”
C. Length/term of the Agreement. The length/term of the Management Agreement will be negotiated
between the owner and the management agent. However, HUD will require a minimum one-year
term. HUD may also impose a maximum term on the Management Agreement if the agent was
approved by HUD on a conditional basis.
1. The Agreement may provide for a fixed term or an open-ended term (e.g., automatically renewable
or “to remain in effect until cancelled by HUD, the owner, or the agent”).
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Chapter 10
Management Analysis
Approval of Proposed Management Agent
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2. If the length /term of the Agreement changes before initial endorsement, the owner/agent must
submit a new Management Certification.
D. Management Fee: The Agreement must include all specifics of the management agent compensation
and how the management fee will be calculated, including any incentive management fees to be paid
from surplus cash. HUD will review the fee for adequacy and reasonableness for a project of the size
and complexity as what is proposed. The management fee must be equivalent to, and be no less than, a
market rate fee that would be charged by a replacement, third party management agent, if the
replacement agent were to assume responsibility for management of the property.
10.8
Approval of Proposed Management Agent
A. The lender will recommend approval to the Hub Satellite office of the proposed agent if the agent has
demonstrated capacity to effectively manage the property within HUD requirements, the management
agent has shown adequate fidelity bond coverage and the Previous Participation Certification is
approved. In some instances, the lender may find it necessary to recommend conditional approval if
there are areas of the agent’s procedures that are considered weak or that need to be changed. All
conditional approvals will be discussed with the proposed agent and any agreements/conditions that
are imposed will be shown both in the letter approving the agent, and in the Firm Commitment.
B. The lender must provide a report regarding its review and recommendation which includes the
following information:
1. Name of the proposed management agent.
2. Composition of the proposed management agent.
3. Narrative of the agent’s experience and capacity to operate the subject property, with particular
emphasis on its past experience and capacity to manage affordable or subsidized properties, if
applicable.
4. Demonstration that adequate fidelity bond coverage is in effect and that the proposed management
agreement meets HUD’s requirements.
5. A recommendation to approve the proposed management agent.
C. The Hub/Satellite office may disapprove a proposed management agent based on the decision of the
Review Committee to deny or withhold approval for the proposed agent’s participation. The
Committee may base its disapproval on the lack of the management agent’s capacity to effectively
manage the project within HUD requirements and to adequately meet the requirements of this Chapter.
To proceed with a Firm Commitment review, the owner must then propose an alternative management
agent (and supply all required documentation). The owner may appeal the decision of the Previous
Participation Committee under 24 CFR, Part 200.241.
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10.9
Chapter 10
Management Analysis
Affirmative Fair Housing Marketing
Document page 349
D. HUD will review the lender’s report and the management entity profile and make the final
determination to accept or reject the proposed management agent.
10.9
Affirmative Fair Housing Marketing
The Affirmative Fair Housing Marketing Requirements (24 CFR 200.600, Subpart M) apply to all insured
new construction and substantial rehabilitation projects of 5 or more units. Each applicant for insurance
must submit an Affirmative Fair Housing Marketing Plan (AFHMP) or Form HUD-935.2A. The plan
must describe an affirmative program to attract residents regardless of race, color, religion, sex, disability,
familial status, sexual orientation or national origin to the housing for initial rental. The plan must show
use of a marketing area with a diverse population and targeted outreach to demographic groups in the
diverse area that are least likely to apply for the housing. The affirmative advertising program shall use
majority and minority media and organizations and target those groups within the market area that would
not ordinarily apply without concerted outreach. . The plan should include information on the applicant’s
nondiscriminatory hiring policy, its training program on nondiscrimination for its rental staff, and the
display of the Department’s Equal Housing Opportunity logo type and slogan. HUD must review and
approve the Plan prior to the issuance of the Firm Commitment. The HUD approved AFHMP must be
closely followed by the owner and management agent and must be regularly updated in accordance with
HUD requirements.
Applications under Section 223(f), while covered by the nondiscrimination provisions of the Fair Housing
Act and Executive Order 11063, are exempt from the submission of a written plan. However, a Section
223(f) applicant is required to maintain records of its affirmative marketing efforts.
10.10
Management Agent Responsibility for Escrow Administration
Management Agents must cooperate with the lender and with the Hub/Satellite office staff in
administration of the Initial Operating Deficit (IOD) escrow, including any disbursements permitted and
the release of any escrow balance remaining. The terms and procedures for release of the IOD are
addressed in Section 12.15.D.2.
Management Agents must cooperate with the lender and with the Hub/Satellite office staff in
administration of the Reserve for Replacements account (per the reserve schedule and deposit
requirements included in the Firm Commitment) and in the requirement to obtain a new Project Capital
Needs Assessment (PCNA) every 10 years during the loan term. See Appendix 5 for more details on
PCNAs.
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Chapter 11
Lender Underwriting, HUD Review and Closing Matters
11.1
General
Document page 350
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Chapter 11
Lender Underwriting, HUD
Review and Closing Matters
11.1
General
The MAP program delegates due diligence and underwriting responsibility to MAP approved
Underwriters and lenders. The MAP approved Underwriter is expected to be completely familiar with the
contents of the MAP Guide, have demonstrated experience and mastery of commercial lending practices
and real estate finance, and have a working knowledge of HUD regulatory and statutory authority.
HUD retains commitment authority and responsibility for final determination of acceptable risk to the
insurance fund, as well as certain technical and compliance responsibilities. This in no way relieves the
MAP Lender from responsibility for their underwriting and programmatic compliance.
The basic function of a MAP approved Underwriter is to objectively evaluate the following factors in
making a credit approval recommendation:
•
Character, creditworthiness, competence, and capacity of the borrower and development team
members;
•
Cash flow sufficient to service the proposed loan;
•
Collateral quality, including valuation, physical condition, environmental factors and location;
•
Capital structure, including all proposed indebtedness and equity;
•
Cash available to close, given the total mortgageable and non-mortgageable costs of the transaction;
and
•
Compliance with HUD program and processing requirements.
The Underwriter must identify all material risks and weaknesses, with appropriate mitigants including
quantitative analysis and stress testing to identify the impact of “worst case” scenarios. If a transaction
recommended by a lender is properly underwritten and processed, and is complete and technically
compliant, HUD’s role is to review the application and the lender can assume a timely determination.
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If the application fails to identify material underwriting risks and mitigants, or has material processing or
compliance deficiencies, HUD has the option to reject the application, re-underwrite it and approve with
conditions, or return the application to the lender for modifications to address deficiencies.
The responsibilities of MAP lender and HUD underwriters are addressed in Chapter 4 (Processing) and in
this chapter.
11.2
Lender Underwriting
A. The lender is responsible for assigning a MAP approved Underwriter for the Pre-application or Firm
Commitment. The MAP approved Underwriter is responsible for the selection and performance of the
third party professionals (both the firms and individuals). The Construction Loan Administrator must
be approved prior to the Firm Commitment stage if the closing and servicing lender has been
identified, or as soon as identified.
The lender’s MAP Approved Underwriter is responsible for oversight and performance of the
following tasks:
1. Data collection;
2. Due diligence, including selection and management of their third party consultants. The MAP
Lender is responsible for underwriting the loan. This responsibility necessarily requires the
lender’s oversight, acceptance and recommendation to HUD for approval of the conclusions and
recommendations of the third party reports, except as modified, explained, and justified in their
underwriting
3. Loan Processing;
4. Mortgage Credit review;
5. Underwriting;
6. Obtaining internal loan approval (from the lender’s loan committee or other process);
7. Submission of the loan application to the appropriate Regional Center or Satellite Office and
payment of the application fee;
8. Responding to HUD deficiency letters and requests for information;
9. Coordinating with the lender and their counsel, and follow-up to get the loan to closing;
10. Coordination with construction loan administration, cost certification, and servicing.
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B. Pre-application. The lender's underwriter must determine that the submission meets the requirements
of this Guide and represents an acceptable risk to the insurance fund. The pre-application submission
to the field office must include a Standardized Underwriter Narrative, and together with any additional
information and all narrative attachments, which provides:
1.
2.
3.
4.
A summary of the relevant data and quantitative analysis.
Strengths, weaknesses, risks and mitigants.
A summary of programmatic eligibility and technical factors considered.
A description of the proposed project and the surrounding market conditions, including demand,
extent of competition, vacancy rates, market absorption, details about features of the proposal
(e.g., zoning, unusual site conditions, environmental) which may present potential problems, and
any other information that would be useful to analyze the proposal.
5. A description of the individual or entity in control of the borrower (plus general contractor and
management agent, if known), their qualifications, the identification of principals and a
preliminary mortgage credit and creditworthiness review.
6. Explanations for any differences between the underwriting conclusions and the third party due
diligence.
7. A list of proposed in-house and third party reviewers of the application and their qualifications.
Further details on the required content of the Standardized Underwriter’s Narrative and the materials
to be included in the pre-application can be found in this Guide and appendices.
C. Firm Commitment Application: The lender’s underwriter must review the in-house and third party
reports to ensure the processing of the loan is in accordance with the requirements of this Guide and
determine that the loan recommendation represents an acceptable risk and is financially sound. The
underwriter must document any changes made to the technical reports and must submit an updated,
signed Standardized Underwriter’s Narrative describing all relevant aspects of the mortgage
transaction including a full discussion of the following:
1. Characteristics of the proposed mortgage loan that make it financially sound or an acceptable risk,
with the reasons why the lender recommends the loan.
2. All significant risk factors and risk mitigants.
3. Changes in the project from the pre-application stage including changes in sponsorship, proposed
development team and lender reviewers.
4. Evaluation of the mortgage credit and financial capacity of the principals of the borrower and its
ability to repay the loan.
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5. Evaluation of the financial and technical capacity of the general contractor to build/rehabilitate the
project.
6. Property financial analysis (both actual operating history and projected trends).
7. Property physical description.
8. History of borrower’s involvement including their equity investment in the property, and if
applicable, any previous engagements to obtain FHA financing for the property.
9. Analysis of market, rents, expenses and estimated rent-up and operating deficit.
10. Adequacy of the proposed Reserve for Replacement.
11. Documentation of any changes the underwriter made to the appraisal/technical reports with
justification.
12. Requests for any waivers of Guide requirements with supporting documentation and justification
summary.
13. Certifications from the individual reviewers (see Section 11.2.H).
Further details on the required content of the Standardized Underwriter’s Narrative and the materials
to be included in the Firm Commitment application can be found in this Guide and appendices.
D. The MAP Underwriter should perform the site visit for new construction properties and for existing
properties an on-site lease audit and physical inspection representing a sample of each unit type.
Alternatively, an analyst, underwriter trainee, or different MAP approved underwriter acting under the
direction of the underwriter (i.e., one that does not report to the originator) may perform the site visit
and physical inspection of the units. The underwriter or trainee who conducts the inspection must be
identified in the narrative. Typically, the leases that are audited will be the same as the units that are
inspected, as follows:
1. For projects 50 units or less: Inspect at least 1 of each unit type, to include a representative sample
of 10% of the units.
2. For projects between 51 and 250 units: Inspect at least 1 of each unit type, to include a
representative sample of 10 units plus 5% of the total number of units greater than 50.
3. For projects greater than 250 units: Inspect at least 1 of each unit type, to include a representative
sample of 15 units, plus 2% of the total number of units greater than 250, for a maximum of 50
units.
4. The terms of the leases must be compared to the rent roll, verifying the unit number, resident
name, lease commencement date, expiration date, concessions, if any, and monthly rent, and must
confirm that this data is consistent with the assumptions used in the underwriting analysis.
5. Any inconsistencies or conflicts between the leases, rent roll and the underwritten revenue
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assumptions must be fully investigated and explained. The scope and results of the lease audit
review must be discussed in the Underwriter’s Narrative. The underwriter should retain a copy of
the individual leases reviewed in their working papers, which may be subject to audit but should
not be included in the Firm Commitment application submission.
E. The underwriter is responsible for the review and reconciliation of the third party reports and the
results of the mortgage credit review and other due diligence.
F. Lender Due Diligence Certification: With each Firm Commitment package, the lender must submit a
letter signed by the MAP approved underwriter which certifies that:
1. The lender has reviewed all in-house and third party forms/reports/reviews;
2. The preparer of the forms/reports/reviews is qualified as required by this Guide and has all
required insurance coverage(s);
3. The forms/reports/reviews were prepared in the manner required by the Guide are complete and
accurate;
4. The identity of staff and contractors who contributed to the underwriting presentation and their
role; and
5. The proposed loan represents an acceptable risk to the Department and is financially sound, based
upon the lender's review and analysis, and that the application complies with all HUD statutory,
regulatory, guidebook and administrative requirements.
The letter must include the following certification and language:
I am employed full time by the MAP Lender and have no other side deals, agreements, or financial
considerations in connection with this transaction.
G. Third party report Certifications. The following Certification must be included in the lenders third
party reports:
I understand that my (appraisal, market study or architectural, cost, environmental, or other specialized
report) will be used by _______ (name of MAP Lender) to document to the U.S. Department of
Housing and Urban Development that the MAP Lender’s application for FHA multifamily mortgage
insurance was prepared and reviewed in accordance with HUD requirements. I certify that my review
was in accordance with the HUD requirements applicable on the date of my review and that I have no
financial interest or family relationship with the officers, directors, stockholders, members or partners
of the lender or affiliated entities, Borrower or affiliated entities, the general contractor, any
subcontractors, the buyer or seller of the proposed property or engage in any business that might
present a conflict of interest.
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H. Both the underwriter and third party certifications must contain the following warning language:
_______________________________________ Signature.
I hereby certify under penalty of perjury that all of the information I have provided on this form and in
any accompanying documentation is true and accurate. I acknowledge that if I knowingly have made
any false, fictitious, or fraudulent statement, representation, or certification on this form or on any
accompanying documents, I may be subject to criminal, civil, and/or administrative sanctions,
including fines, penalties, and/or imprisonment under applicable federal law, including but not limited
to 12 U.S.C. § 1833a; 18 U.S.C. §§1001, 1006, 1010, 1012, and 1014; 12 U.S.C. §1708 and 1735f-14;
and 31 U.S.C. §§3729 and 3802
I. HUD Forms Submission. The lender must submit a Standardized Underwriting Narrative,
“wheelbarrow” data submission and a HUD-92013. The HUD-92264 and HUD-92264-A forms are
still required at this time; no signature by the lender or their third parties is required. The lender must
certify that all parties preparing forms, reports or reviews are qualified as required by the Guide.
11.3
HUD Regional Center or Satellite Office Underwriting Review
A. Under the direction of the MF Regional Center Director or other appropriate managers, the HUD
underwriter is responsible for coordinating with technical support and other HUD staff, and the
oversight and performance of the following tasks:
i.
ii.
iii.
iv.
v.
vi.
Conduct of Concept meetings and follow-up communication;
Review of proposed MAP Lender and Underwriters and reporting to Asset Management and
Counterparty Oversight Division is any concerns;
Working with the Workload Distribution Lead for the Regional Center and/or Satellite Office and
other appropriate officials in managing workload assignments for new applications;
Screening applications for completeness, and fiscal controls for new application submissions;
Conducting an “Early Warning System” screening to determine what level of underwriter and
technical specialist review is required given the complexity and risk factors associated with the
transaction, and specific risk issues in the transaction;
After screening or during the underwriting and technical review, the Regional Center or Satellite
Office will advise the lender of deficiencies in the application and the lender will have 5 business
days to correct the defects or deficiencies. If the defects/deficiencies cannot be corrected within
the 5 business days, or such other time frame as the Regional Center Director determines as
appropriate, HUD will reject the application.
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viii.
ix.
x.
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Acknowledging receipt of the application, management of the queue and estimating processing
target dates;
Advising the lender if there are deficiencies or additional information is needed;
Performing technical reviews based on lender underwriting and third party reports, or arranging for
technical specialist reviews for higher risk or complex transactions or functions that need specific
technical analysis given the features of a particular transaction;
Recommending transactions for loan approval (or rejection) decisions;
Preparing and issuing Pre-application Invitation letters and Firm Commitments;
Coordinating the closing process with OGC, the lender, and borrower’s team;
Coordinating with Asset Management in turnover of files, briefing about conditions of the Firm
Commitment, and providing information necessary for Asset Management’s risk rating of the
transaction.
Coordinating with Asset Management and/or HUD’s Departmental Enforcement Center (DEC) to
ensure that any open DEC referrals with respect to the borrower or the proposed managing agent
are resolved.
B. Pre-application and Firm Commitment Processing.
The HUD underwriter will conduct, or arrange for the Pre-application or Firm Commitment review,
including any required technical specialist reviews. The HUD underwriter will coordinate the
technical reviews, resolve any inconsistencies and make a recommendation as to whether an
application should be approved, modified or rejected. They must document and justify any
recommendation to approve a loan or to require conditions with which one or more technical
reviewers non-concurs.
If a HUD technical review does not concur with the conclusions approved by the Regional Center or
Satellite Office Director, they may document their non-concurrence separately in the file. The HUD
underwriter should address the non-concurrence and document how the issues were addressed in the
loan approval decision.
Upon completion of the technical reviews and the environmental assessment, the HUD Underwriter
will prepare a memorandum to the Regional Center or Satellite Office Director summarizing the
individual reviews of the specialists, any proposed waivers of Guide requirements and the Team
Leader’s overall recommendation.
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C. Underwriting Recommendation.
The memorandum recommending loan approval will be in the standard loan committee report or
alternative format, and specifically address:
1. The adequacy of the initial operating deficit for any new construction or substantial rehabilitation
loans;
2. The adequacy of the working capital escrow and construction contingency for any new
construction or substantial rehabilitation loans;
3. The adequacy of the initial deposit and ongoing payments to the reserve for replacement;
4. A description of any non-critical repairs to be performed after closing for Section 223(f) loans;
5. In a tax credit transaction, the schedule of the equity contribution at closing and remainder during
various stages of the construction period;
6. The architectural drawings and specifications; and
7. Any environmental conditions or other concerns.
Back-up documentation necessary to prepare and issue the Firm Commitment should be attached or
available, including Previous Participation Certification from APPS, the technical staff reviews, the
lender narrative summary, the lender’s technical reviews, Forms HUD-92264 and HUD-92264-A
signed by the HUD reviewers and Team Leader. Where the HUD underwriter has rejected a
conclusion by a technical reviewer, or has modified any technical recommendation by the lender or
HUD reviewer, documentation and justification must be included in the memorandum.
HUD’s review appraisers have the option to modify appraisal conclusions internally or to return the
application to the lender for revision of the appraisal. Should the HUD review appraiser choose to
modify the appraised value, rent or expense conclusions internally, as per USPAP Standard 3, this
opinion becomes its own appraisal whether it concurs with the opinion of value in the work under
review or differs from the opinion of value.
D. Firm Commitment Issuance, Amendments, Reissuance, and Extensions.
1. Upon issuance of a Firm Commitment, the HUD Underwriter will provide such support as needed
and requested to the closing coordinator to prepare for closing, and provide files, data, and
information as needed by the Account Executive to facilitate Asset Management’s rating and
servicing of the loan.
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2. Firm Commitments will be issued for a term of 60 calendar days. The lender has the option of
requesting an extension of the Commitment to prepare for the Initial Endorsement submission. The
Regional Center Director (or their designee in accordance with delegated authority) may grant one
or more extensions for up to a total of 120 calendar days from the original expiration date. Further
extensions must be approved by the Director of Multifamily Production in HUD Headquarters.
When the Regional Center Director determines that extenuating circumstances justify a limited
extension of an outstanding Firm Commitment, the lender must certify and Regional Center
Director must concur that the documentation provided by the lender demonstrates that granting the
extension will not likely change the underwriting data and assumptions on which the Firm
Commitment was issued or undermine the feasibility of the project. Such factors include but are
not limited to a change in the borrower’s or development team’s configuration or financial
capacity, market, inflation or other factors impacting cost. A change in the interest rate or other
terms or conditions of the Firm Commitment may require reprocessing and amendment of the Firm
Commitment.
If a Firm Commitment has been extended beyond 120 calendar days from its original date, the
lender must provide updated appraisal/market study, cost and mortgage credit, or other information
as required by the Regional Center or Satellite Office for review prior to loan closing.
3. Only the Regional Director, Regional Operations Officer, Production Division Director, or other
officials formally designated to act in these capacities are authorized to sign Firm Commitments or
endorse Insured Mortgage Notes.
4. The Department has limited flexibility to permit the resubmission of rejected applications. In
accordance with the procedures contained in HUD Handbook 4410.1 Rev-2, Project Fiscal
Procedures will apply.
5. Amended Commitments. An amended commitment bears the same date as the original
commitment, followed by the date of the amendment, although the applicable regulations are those
in effect on the original commitment issuance date. Most underwriting changes, such as changes
in mortgage amount and/or interest rate, will be incorporated in letter amendments to the
commitment.
6. Special Conditions. Special Conditions are part of the Firm Commitment. Changes to the
specific terms of such conditions, or allowing closings to proceed when conditions are not yet met,
must be documented with a letter amendment to the Firm Commitment
E. Reissued Commitments. A reissued commitment will have its own date which will control what
regulations apply and how long the commitment will remain in effect, and will substitute for the
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originally issued commitment. A lender which accepts a reissued commitment will no longer have
rights granted under the original, or a previously amended, commitment. A re-issued commitment is
required for:
1. Requests for reconsideration of an expired or terminated commitment;
2. Changes in project location;
3. Major changes in plans and specifications; and
4. Reprocessing to reflect changes in the MIP.
F. Waivers.
1. Statutory requirements shall not be waived under any circumstance. Regulations may only be
waived by an Assistant Secretary (usually the FHA Commissioner for MAP loan issues other than
environmental regulatory waivers) If there are questions about whether a given requirement is
statutory or regulatory, please consult with the HUD Office of General Counsel.
2. The Regional Center Director may waive requirements of this Guide that are not statutory or
regulatory except for the following matters which must be approved in HQ:
a. Debt coverage ratios for all programs;
b. Loan to value ratios for Section 223(f) loans;
c. Loan to cost ratios for the 221(d) and 220 programs;
d. Traditional Application Processing for MAP eligible transactions;
e. Substantive modifications to the Ground Lease addendum form (HUD-92070M);
f. The requirement for a Single Asset Borrower Entity (see 24 CFR 200.5);
g. The prohibition on a lender advancing fees for payment of discounts on behalf of the
Borrower;
h. Payment of broker or referral fees to any party with an identity of interest with the borrower or
its affiliates;
i. Extensions of Firm Commitments beyond 180 days of issuance (original term of 60 days plus
up to a 120 day extension);
j. Approval of applications in which the Regional Environmental Clearance Officer non-concurs
with approval of an FHA mortgage insurance application; and
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k. Approval of properties subject to floodway and coastal high-hazard area prohibitions with
improvements in a floodplain considered incidental.
3. The Regional Center Director will submit to the Director of the Office of Multifamily Housing
Production all waiver requests requiring HQ approval as early as possible. Requests for regulatory
waivers will take longer to process since they require review and concurrence from the Office of
General Counsel and the Deputy Assistant Secretary for Multifamily Housing, as well as the
approval of the FHA Commissioner. HQ will not consider waiver requests submitted directly by
MAP Lenders.
4. Any waiver granted in connection with the proposed transaction must be documented in the field
office docket and HQ docket, along with the lender’s request and field office request. Waivers
granted by the Regional Center must be submitted, along with supporting documentation, to the
Office of Multifamily Housing Production to determine if changes to this Guide or the regulations
are necessary.
11.4
Program Closing Provisions
The FHA Multifamily Program Closing Guide addresses various program closing provisions and
procedures that the lender must be aware of to prepare for initial closing, final closing and initial/final
closing events. The HUD underwriter’s responsibilities include:
A. Ensuring all Special Conditions to the Commitment have been individually addressed and satisfied,
including the resolution of any open DEC referrals, prior to or in tandem with closing;
B. Reprocessing and amending Firm Commitments as necessary and appropriate;
C. Extending or Re-issuing Firm Commitments; and
D. Coordinating with Asset Management staff to ensure the orderly transition from Production to
Servicing.
E. Coordinating the closing schedule with OGC, the lender, and borrower;
11.5
Loan Fees
A. Loan Fees. Lenders may charge loan origination and placement fees, both of which are mortgageable,
and the combination of which cannot exceed 3.5% of the mortgage amount (or 5.5% for tax-exempt
bond financing) for Section 223(f) refinancing transactions and new construction or substantial
rehabilitation transactions. The maximum fees for Section 223(a)(7) loans is 2% for loans greater than
$2 million, and up to $40,000 for loan amounts less than $2 million. In addition to loan origination
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and placement fees, lenders may realize trade profit (also known as marketing gain) on the sale of
Ginnie Mae or other mortgage backed securities.
Mortgagee Letter 2011-5 revised the loan fee reporting requirements for multifamily lenders. Lenders
are now required to report loan fees earned that exceed five percent (5%) of the insured loan amount
on each FHA-insured loan over $2,000,000 endorsed during the lender’s fiscal year period covered in
its audited financial statements. Loan fees include: (a) origination and placement fees as permitted by
this Guide, plus (b) trade profit, trade premium or marketing gain earned on the sale of the Ginnie Mae
security at a value above par, even if the security sale is delayed until after endorsement, minus (c)
loan fees applied by the lender to its legal expenses incurred in connection with loan closing. This
reporting is confidential and is not subject to release under the Freedom of Information Act, but will
be examined by HUD in evaluating counterparty risk as part of the lender monitoring responsibility.
The loan fees on a particular transaction that exceed 5% must be reported by both the originating
lender and closing lender when the loan is assigned for closing and fees are split between the two
entities. Trade profit fees used to pay prepayment penalties on behalf of a borrower in a Section
223(a)(7) transaction are not net out of the loan fees in calculating whether or not the loan fees
exceeded 5%.
B. Loan fees are earned are as follows:
1. Construction loan fees are earned at initial closing, except to the extent that the loan documents
defer a portion to a later date. Construction loan extension fees are not earned until the time such
extensions are granted.
2. Permanent loan fees and permanent loan extension fees, to the extent a separate permanent loan is
anticipated, are earned at final closing.
3. Construction/Permanent loan fees (for construction loans anticipated to convert to permanent
loans) are earned at initial closing, except to the extent that the loan documents defer a portion to a
later date.
C. Deferred Fee Collection. Section 8.15.D.4 sets forth provisions for the deferred collection of fees in
connection with tax-exempt bond financing.
D. Broker’s Fees.
1. Fees to mortgage brokers are allowed so long as they are disclosed in the Underwriting Narrative
and form HUD-92434M (or HUD-92455M, as appropriate), there is no identity of interest between
the mortgage broker or its affiliates, or the lender and its affiliates, and the borrower or its
affiliates, and the broker is actively engaged in the business of mortgage loan origination.
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Title Matters
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Referral fees to other parties, such as consultants, management agents, or entities or individuals
with any identity of interest with the borrower or its affiliates are prohibited.
2. Lender or affiliates of lenders may not pay anything of value directly or indirectly to any person or
entity in connection with an insured transaction if the person or entity has received any other
compensation from borrower, seller, builder or any other person for services related to the
transaction, or related to the purchase or sale of the mortgaged property, except as approved by the
Director of Multifamily Production in HUD Headquarters. See 24 CFR 202.5(l).
11.6
Title Matters
A. As noted in the Application Checklist, a preliminary or pro forma title search should be reviewed as
part of the Firm Commitment processing. It is used to validate existing indebtedness, ensure correct
legal description of the parcel(s) to be mortgaged, and the adequacy of title with respect to matters
such as liens, easements, restrictions and other exceptions. Please see the FHA Multifamily Program
Closing Guide for additional requirements related to title and survey matters.
B. Air Rights and Other Shared Interest Projects.
1. A three dimensional air rights map for air rights projects is required. The existence of adequate
vertical ways to the ground for required services, e.g., utility and fire suppression lines, chimneys,
trash chutes, elevators and emergency exit stairs must be verified. In addition, there must be an
acceptable discharge to a public way from all building egresses, including emergency exits, and
services, e.g., trash removal.
2. Maintenance, joint use, easement and other agreements may be required. In cases where common
facilities exist between the insured parcel and an adjacent parcel, borrower must provide for
recordation of an agreement for the common use land and facilities, e.g., common drives, common
lobbies, elevators, walkways, utility roads, parking structures, recreation facilities, storm water
management facilities (retention ponds detention ponds, swales and culverts) or other air rights
project common facilities. The agreement must grant rights to the HUD project site and its
residents to use the common facilities. If the HUD project is subject to property/homeowner
association documents such as with a cooperative, these documents may provide for maintenance,
access and cost sharing, which must be determined acceptable to HUD prior to or as a condition of
the Firm Commitment.
3. If the air rights parcel in on a leasehold, it will need to include the Ground Lease addendum form
(HUD-92070M) with minimal modifications to reflect an air rights lease.
4. The Regional Center or Satellite Office Director must:
a. Assure that the integrity and maintenance of air rights platform foundations and other
structural members are defined as the air rights provider's responsibility.
b. Verify that shared maintenance/operating costs are equitable and that enforcement rights
protect the project interests.
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Borrower Entity’s Organizational Documents
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c. Require easements, cross easements or other documents to provide the HUD project and its
residents the right to use the common facilities.
11.7
Borrower Entity’s Organizational Documents
A. Borrower Entity’s Organizational Documents
1. General. Draft (or final) organizational documents should be reviewed as part of the
creditworthiness analysis during Firm Commitment underwriting. Organizational documents for
the borrower entity are required to be submitted at closing. The specific documents required for
each type of borrower entity are set forth in the FHA Multifamily Program Closing Guide. These
requirements apply to all types of closings including initial, initial/final, and final endorsements.
For multi-tier entities, mortgagor entities will also be required to submit organizational documents
for the tier at which Multifamily Regional Center staff has determined ultimate control over the
day-to-day operations of the project resides.
2. Terms. The documents must include the required language found in the FHA Multifamily
Program Closing Guide, and at a minimum must expressly state:
a. That the duration of the borrower entity is at least as long as the term of the FHA-insured
mortgage.
b. That the terms of the HUD Regulatory Agreement take precedence in the event of any conflict
with the terms of the organizational documents. Note the document should not include
language which is in direct conflict with the terms of the Regulatory Agreement or the HUD
required language from the Closing Guide.
c. That the borrower entity has authority to enter into the transaction and to comply with the
requirements of the insurance program.
d. That unless approved otherwise by HUD, the borrower entity is a single purpose-single asset
entity.
11.8
Note
A. Term. The term must be the same as specified in the Firm Commitment, which must be within the
maximum terms allowed by the program and not less than 10 years.
1. Generally, for most new construction or substantial rehabilitation rental projects, the term,
calculated from the date of completion of construction, may not exceed the lesser of 40 years or
75% of the project's remaining economic life.
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2. For existing projects (insured under Section 207 pursuant to Section 223(f)), the term must be not
less than 10 years, and may not exceed the lesser of:
a. 35 years, or
b. 75% of the estimated remaining economic life of the physical improvements.
3. For 223(a) (7) projects, the term of the mortgage is limited to 12 years beyond the remaining term
of the existing mortgage (excluding any previous Section 223(a)(7) loan) so long as the PCNA and
underwriting determine that the loan term is no more than 75% of the remaining useful life of the
property.
B. Prepayment Provisions.
Generally, prepayment lockout and/or penalty structures that are
commercially reasonable and consistent with industry practice, that expire after 10 years and are no
more than 10% during any of the first 10 years, and no more than 1% thereafter are acceptable, so long
as the interest rate is commercially reasonable at the time of the rate lock.
The following additional conditions and terms apply:
1. Market rate properties.
a. Prepayment must be permitted in whole or in part so long as 30 days advance written notice is
given to lender of intent to prepay, except for Section 223(f) loans (subject to statutory five
year prepayment lockout), which must meet certain conditions and receive HUD approval if
the property will be converted to a use other than rental housing, in order to prepay within the
five year prepayment lockout.
b. Prepayments must be permitted for up to 15% of the original principal amount in any one
calendar year without a prepayment charge. Prepayments exceeding 15% may be subject to a
reasonable charge agreed to by borrower and lender and included in the Mortgage.
c. Notwithstanding the borrower’s right to prepay, a HUD 9807 must be processed in order for
HUD to release the recorded Regulatory Agreement.
2. Affordable or subsidized properties.
a. FHA insured projects which are, or formerly were, affordable or subsidized and are subject to a
Use Agreement, Regulatory Agreement, or similar restrictive covenants require prior written
consent of HUD to prepay the mortgage debt.
b. HUD may approve partial prepayments to reduce succeeding monthly payments over the
remaining portion of the original mortgage term, or may also approve partial prepayments
made after 30 days written notice. Prepayments exceeding 15% of the original principal
amount may be subject to a reasonable charge on such excess as agreed to by borrower and
lender and included in the Mortgage.
3. Prepayment of bond-financed or Ginnie Mae securitized mortgages. Where the mortgage is given
to secure Ginnie Mae mortgage-backed securities or a loan made by a lender that has obtained the
funds for the loan by the issuance and sale of bonds or bond anticipation notes, or both, the
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mortgage may contain a prepayment restriction and prepayment penalty charge acceptable to the
Commissioner as to term, amount, and conditions.
C. Conditions for Including Lockouts and/or Penalties. Compliance with the following conditions is
required when prepayment lockouts and/or penalties are permitted.
1. Lender’s Certificate and Request for Endorsement. The Lender’s Certificate, Form HUD-92434M
(section 24(a)) and the Request for Endorsement, Form HUD-92455M (section 25(a)), requires the
lender to certify that in the event of a default during the term of the prepayment lockout and/or
penalty (i.e., prior to the date on which prepayment may be made with a penalty of one percent or
less), it will comply with Program Obligations. The Lender, in order to comply, must:
a. Request a 3-month extension of the deadline prescribed by 24 C.F.R. Section 207.258(a)(2) for
filing a notice of its intention to file an insurance claim and its election to assign the mortgage;
b. Assist the Borrower to arrange refinancing to cure the default and avert an insurance claim if
HUD grants the requested (or shorter) extension of the notice filing deadline;
c. Report to HUD at least monthly on any progress in arranging a refinancing;
d. Otherwise cooperate with HUD in taking reasonable steps to avoid an insurance claim;
e. Require any successors or assigns to certify in writing that they agree to be bound by these
conditions for the remainder of the term of the prepayment lockout and/or penalty period; and
f. Notify HUD of the delinquency where a payment is not received by the 16th day of the month
in which it is due.
D. Late Charge Provisions. Lender may collect a late charge for the cost of handling delinquent
payments, subject to the following:
1. Charges must not exceed two cents per dollar of unpaid principal and interest that is more than 10
days in arrears.
2. Late charges must be separately charged to and collected from borrower and cannot be deducted
from any total monthly mortgage payment, or collected from any reserve escrow, residual receipts
funds, or from any interest accruals thereto.
E. Where obligations pursuant to tax-exempt bond financing or Ginnie Mae involvement do not impose
restrictions independent of the lender’s restrictions, HUD may consider exercising an override of
prepayment lockout and/or premium provisions imposed by the lender if:
1. Borrower has defaulted on the insured loan and HUD has received notice as required by the
regulations;
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2. HUD determines that the project has been experiencing a net income deficiency, which has not
been caused solely by management inadequacy or lack of owner interest, and which is of such a
magnitude that the borrower is currently unable to make required debt service payments on the
insured loan, pay all project operating expenses and fund all required HUD reserves;
3. HUD finds there is a reasonable likelihood that the Borrower can arrange to refinance the
defaulted loan at a lower interest rate or otherwise reduce the debt service payments through
partial prepayment; and
4. HUD determines that refinancing the defaulted loan at a lower rate or partial prepayment is
necessary to restore the project to a financially viable condition and to avoid a full insurance claim.
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Chapter 12
Construction Period
Start of Construction – Sections 221(d)(4), 220
and 241(a)
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Chapter 12
Construction Period
12.1
Start of Construction – Sections 221(d)(4), 220 and 241(a)
A. Start of initial construction is the date when contract work commences. It must be diligently pursued
without appreciable delay between activities and includes site clearance and other preparatory site
work.
B. Early start of construction may be authorized in accordance with early start procedures (see Section
5.8.F). Where it occurs:
1. A pre-construction conference is required before the start of initial construction;
2. Construction inspections and change orders must be completed in accordance with this chapter;
3. Authorization of any insured advances cannot occur until the endorsed instrument is recorded at
initial closing.
12.2
Pre-Construction Conference
A pre-construction conference is required for every project and must precede the initial start of
construction, including early start of construction. The HUD Inspector is an independent third party
contracted out for the monitoring of the construction and renovation of multifamily housing projects that
are insured by the Department of Housing and Urban Development. The HUD Inspector usually conducts
the pre-construction conference and should hold it at initial endorsement where feasible, with the required
participants present. The pre-construction conference may be conducted by the HUD Construction
Manager (or designate), if the HUD Inspector is unable to attend, and may be scheduled shortly before or
after the initial endorsement if necessary.
A. Required attendees:
1. Borrower’s representative;
2. Borrower’s supervisory Architect;
3. General contractor;
4. Major subcontractor(s);
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5. HUD representative;
6. HUD Underwriter; and
7. Lender’s representative.
B. Supplementary Conditions of the Contract for construction, Form HUD-92554M. The HUD
representative must address Davis-Bacon wage rates, Federal labor standards and equal employment
provisions, including:
1. Contract obligations of the general contractor and all subcontractors, including:
2.
3.
4.
5.
a. Certification of compliance with Davis-Bacon wage rates with each request for advances.
b. That Davis-Bacon wage rates are applicable to a second mortgage securing a governmental
loan.
Statement of sanctions that may be imposed for not complying with the supplemental conditions.
Requirement that the applicable Davis-Bacon wage decision and the Form HUD-92554M must be
made part of the subcontracts for all tiers.
Emphasize the importance of Federal wage payments, prompt certified payroll submissions and
proper record keeping. Instruct that a copy of the applicable Davis-Bacon wage decision and Form
WH-1321, Notice to Employees, must be conspicuously posted on the job site.
Indicate who on the HUD Labor Standards and Enforcement staff will review for labor standards
compliance and refer any further inquiries concerning Davis-Bacon wage and reporting
requirements to that staff.
6. Provide the general contractor and the subcontractor(s) with the URL to obtain the Equal
Opportunity poster with instructions to post conspicuously at the job site.
7. Make available copies of HUD’s Contractor’s Guide to Davis-Bacon.
C. Contract Administration
1. Explain general contract administration, including responsibilities of the lender, borrower,
borrower’s Architect, general contractor, and HUD representative.
2. Explain the procedures for:
a. Change orders;
b. Requesting construction document clarifications;
c. Reporting and correcting non-compliant work;
d. Requesting periodic payments and release of escrows;
e. Substantial completion of work or portion thereof; and;
f. Permissions to occupy, including management plans and rent rolls.
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3. Stress that work changes completed in anticipation of a future change order will be regarded as noncompliant. There will be no insured advances for it or other work dependent on it.
4. Periodic advances. Explain:
a. Borrower’s and general contractor’s required preparation of requests, including the field
approval and subsequent processing;
b. Provisions for submitting surveys, title reports, and other documentation in support of
construction advances;
c. Requirements for contractor’s retainage and its release.
5. Stored materials. Explain procedures to request payment for materials stored onsite, and
components stored offsite where applicable. (See Appendices 12B and 12C)
6. Offsite work. Explain procedures to request payment for completed offsite work, the required
retainage and its release.
7. Termination of contract(s). Discuss provisions for terminating the construction contract and/or
Architect’s contract, and the lender’s responsibilities during the construction stage and in the event
of a default.
D. Cost Certification
1. Summarize cost certification requirements for the mortgagor and (if applicable) the general
contractor, subcontractors, equipment lessors and suppliers, and industrialized housing
manufacturers. Where there is a second mortgage securing a Governmental loan, advise that cost
certification also applies to the second mortgage.
2. Inform all parties that a pre-cost certification conference will be held when construction is 90%
complete and that detailed instructions will be provided at that point.
3. Stress that:
a. Identities of interest that develop or become known after initial closing must be reported to the
lender and to HUD within 5 working days of having such knowledge;
b. HUD must give prior approval for all identity of interest subcontractors and apply penalties
where this is not done;
c. Self-owned equipment must be certified; and
d. Paper conduits are prohibited.
4. Clarify the 50/75 percent rule (see Section 13.16).
12.3
HUD Construction Monitoring
A. Purpose of Inspection.
1. Inspection means the periodic observations made of rehabilitation/ construction at the site of a
multifamily housing project by a HUD representative (inspector) for the purpose of protecting
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HUD's interests. Inspections are made to evaluate the contractor's and Architect's performance, to
confirm construction is in accordance with the contract documents and to report on conformance
with prevailing wages and other contract requirements.
2. The instructions for inspection are the same for projects involving the insurance of advances and
those to be insured upon completion, except for those variations specifically stated to be applicable
to one or the other.
B. Access. At all times, HUD has the right of access to the property and the right to inspect all work
performed and materials furnished to complete the project.
C. HUD Construction Manager’s duties. The HUD construction manager (CM) or architectural designee
is responsible for the proper performance of all functions relating to inspection, as well as the
instruction and coordination of all HUD personnel involved. The CM must be kept informed of the
general progress of the work on all projects during the construction stage and guarantee period and
must be familiar with the problems involved.
1. Assignment. The CM will assign either a HUD construction analyst or a contractor to inspect a
project before the start of construction. The person inspecting the project may be a Design
Representative, a Construction Representative, or a person or group hired by HUD to do the
inspections, referred to as an "inspector." The CM will select the inspector on the basis of
competency with regard to the scope of the project and to the type of construction involved.
Several projects being constructed concurrently may be handled by one inspector. Only in very
unusual circumstances will an inspector be assigned full time to any one project. Upon
assignment, the CM will issue to the inspector the following:
a. Set No. 3 of the contract drawings and specifications. This set becomes the HUD as built set
for the inspector to conform it to the contractor's "Record Set."
b. Copy of the construction contract. The required Contract for insured advances is the HUD
Construction Contract, HUD-92442M, which contains alternate provisions for cost plus and
lump sum contracts. The form may or may not be used in insurance upon completion cases,
but a construction contract in some form is required and must be furnished to the inspector.
(1)
Form HUD-92442M, Construction Contract-Lump Sum, may be used when there is no
identity of interest between the borrower and the contractor.
(2)
Form HUD-92442M, Construction Contract-Cost Plus, may be used in any case, and
shall be used when an identity of interest exists between the borrower and contractor.
c. Owner-Architect Agreement, AIA Document B-108, when an Architect is required to
administer the construction contract.
d. Contractor's and/or borrower's cost breakdown - Schedule of Values, Form HUD-2328 when
insured advances are involved.
e. Drawings and specifications pertaining to off-site improvements.
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f. Agreements or contracts providing for off-site construction.
Field Supervision. The CM shall keep informed of the general quality of inspections and the
performance of inspectors by maintaining close contact with their work through job site visits.
A regular routine for supervising field operations should be established and followed. Required
methods of field supervision follow:
a. A minimum of one (or more where appropriate) field review inspections may be made on
each project to evaluate the performance of the HUD inspector. Field review inspections
shall be recorded on a HUD Representative's Trip Report, Form HUD-95379.
b. Construction should be field reviewed where the use of questionable methods of
construction, materials, uncorrected non-compliance, or other problems are reported.
c. Projects should be field reviewed at construction stages where problems have occurred in that
jurisdiction.
Office Review. The CM shall review all Trip Reports, Forms HUD-95379, completed by the
HUD Inspectors. If the reported conditions indicate the necessity or desirability of field
review or other special handling, appropriate action shall be initiated.
a. Review should not be restricted to the entries on the report. The absence of significant
evaluation comments may, under certain circumstances, indicate desirability of field review.
b. The CM should be aware of progress, trends, new or uncorrected non-compliance, unusual
conditions, etc., in order to be familiar with the work and to initiate any required corrective
action immediately.
c. The HUD Inspector shall be advised of any unsatisfactory action or detail in the report, or
any error in its preparation, so that similar mistakes will not occur in the future.
Training.
a. Inspection conferences shall be held when deemed necessary by the CM. The purpose of the
conference is to maintain and improve the quality and efficiency of the construction
observation function.
b. Field and office review of inspections will indicate individual training needs and subjects for
discussion at inspection conferences.
c. It is essential that new inspectors and new staff be trained in the field as well as in the office.
Construction progress meetings. During construction, the contractor, mortgagor, mortgagor’s
supervisory Architect and the HUD inspector must attend monthly job meetings at the job site
when monthly requests for advances are prepared.
a. The owner's representative must be a member of the borrower entity, usually a general partner
or managing member. Non-profit organizations may be represented by an executive officer or
member of the Board of Directors.
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b. The HUD Inspector must:
(1)
Comment to the group on the quality of construction and of the Architect's observations
and the contractor's supervision.
(2)
Comment on all known construction defects and deficiencies (non-compliance) and
methods of correction.
(3)
Explain that changes in the work from the contract documents (non-compliance) must
be resolved by approved change order requests or the work done in accordance with the
contract documents. All change orders must receive prior approval before work subject
to the change order is commenced.
(4)
Inform parties of HUD policy for holdback of construction advances until noncompliance is corrected.
(5)
Record on Form HUD-95379 the issues raised at the meeting. Significant concerns of
any party should be presented by memorandum through the CM to the Regional Center
Director.
c. Monthly meetings may also be used to resolve equal opportunity and labor disputes. When
such disputes are known, the HUD Labor Standards and Enforcement and Equal Employment
officers must be invited to attend.
D. HUD Inspector’s Duties. The inspector is a HUD representative, not a superintendent for the
contractor or "clerk of the works" for the owner or Architect. The inspector, as HUD's agent, must
endeavor in a tactful, helpful and courteous manner to obtain construction that conforms to the
drawings, specifications, and sound construction practice within the scope of the contract. The
inspector must be factual and specific in all statements in reporting and recording significant
construction developments observed.
1. Orientation. Upon assignment to a project, the inspector will study the drawings and
specifications and become familiar with the conditions at the site. If, during this examination
or during construction, any nonconformity with HUD requirements or site conditions not
considered in the design is found, they are to be reported by memorandum through the CM to
the Regional Center Director. The Regional Center Director will work with the lender, owner,
contractor and other related parties to resolve the noncompliance.
2. Facilities. The contractor must furnish the inspector with enclosed working space that is
acceptable to HUD. Adequate, but not elaborate, facilities should be required as soon as actual
construction begins at the site.
3. Inspections. The inspector shall make one job site visit each month, except when HUD determines
no inspection is necessary due to the progress of the work in a particular period. Additional visits
may be necessary due to the nature of the project. The frequency of inspection should assure
reasonable continuity and recognize the size and character of the project, the speed with which
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Construction Period
HUD Construction Monitoring
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construction is progressing and the quality of work on the project. Visits should be scheduled to
observe major construction operations without neglecting lesser operations. Sufficient time must
be allotted to each visit to make a complete inspection.
a. The major functions during inspection are to: Evaluate the construction supervision of the
contractor and contract administration of the Architect; report on occupancy, delays, disputes,
and changes; review completed units and execute the Form HUD-92485 Permission to
Occupy as required; report noncompliance with the contract documents observed by the
inspector and/or the supervisory Architect; determine that the amounts requested by the
contractor and recommended by the Architect for payment are reasonable; conduct employee
wage interviews using Form HUD-11; and report on labor and EEO compliance.
b. Each inspection shall be recorded on a HUD Representative's Trip Report, Form HUD-95379.
c. Reporting requirements.
The following documents executed during inspection must be
promptly sent to the CM, the project Architect and the lender’s Construction Loan
Administrator:
(1) HUD Representative’s Trip Report, Form HUD-95379:
Original to the CM, with copies to the Architect and the lender’s Construction Loan
Administrator.
(2) Contractor’s Requisition, Form HUD-92448:
Original to the lender’s Construction Loan Administrator for signature with copies of the
signed document to the CM, the Architect and the HUD inspector.
(3) Change Order Form HUD-92437:
Original to the lender’s Construction Loan Administrator for signature with copies of the
signed document to the HUD CM, the Architect, and the HUD inspector.
(4) Permission(s) to Occupy, Form HUD-92485:
When all required signatures (mortgagor, architect, and contractor, mortgagee, and HUD
inspector) are affixed, the document will be sent to the HUD CM for approval. Upon
signing by the FHA authorized agent, copies are sent to the lender’s Loan Administrator,
the Architect, and the HUD inspector.
4. Start of Construction. The inspector will report the date of initial construction start and the date of
the start of permanent construction on Form HUD-95379.
a. The date of the initial construction start, used for recording and reporting purposes, is the "start
of construction" as used in connection with labor standards and prevailing wage requirements.
This is defined as the beginning of initial site clearance and preparation, provided these activities are pursued diligently and are followed, without appreciable delay, by other construction
activities.
b. The date recorded as the start of permanent construction, used for the purpose of determining
the earning of the inspection fee, will correspond to the first day that permanent on-site
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building elements were put into place, such as footings and/or foundations, pilings, utility
lines, etc.
c. While excavation is an integral part of foundation work, it does not constitute a start of
permanent construction.
5. Unified Report. At the beginning of construction, the inspector should consult with the HUD
Design Representative and the CM in regard to the need for inspection of the project by HUD
technical specialists. Any differences of opinion between the inspector and the technical
specialist in regard to project construction will be resolved by the CM. The inspector must
submit a unified inspection report to the Architect and the lender.
6. Shop Drawings and Other Data. During the construction period, the inspector must check whether
shop drawings are being submitted by the contractor for approval by the Architect as required by
the AIA General Conditions of the Contract. Upon request by the Architect or the inspector, the
contractor will keep copies of tests, certifications and any other data required by the contract
documents onsite for review.
7. Off-site Fabricated Construction. If off-site fabricated construction components are involved, the
CM will determine if there is a need for inspection at the factory to determine acceptability. If the
manufacturing facilities are outside of the jurisdiction of the HUD Office and inspection is
essential, the CM will submit pertinent drawings and specifications, together with a request to the
Regional Center Director to have the inspection made by the HUD Office located near the factory.
8. Distribution. If an Architect is not required for contract administration, then where these
instructions require the HUD inspector to submit findings to the Architect, they are to be submitted
to the contractor.
9. Work Stoppage. The HUD inspector will report to the CM on Form HUD-95379 any work
stoppage unless such stoppage is due to inclement weather or similar reasons. If known to the
inspector, the reason for the work stoppage should be stated and when resumption of construction
is anticipated.
10. Occupancy. The HUD inspector will complete the portion, "FHA Inspection Report," of Form
HUD-92485, Permission to Occupy, when submitted, to request permission to rent or occupy
specific living units, commercial or other space. The Form is to be submitted when the inspector
reports safe ingress and egress to the units and/or building, as evidenced by a certificate of
occupancy from the locality. In the event that scheduling does not permit the inspector to inspect
the completed units on a timely basis, then the CM may authorize the Architect to issue a phased
Permission to Occupy on condition that the Contractor will inspect the completed units at the next
regularly scheduled site visit. Units and spaces should not be occupied prior to approval by HUD.
The Regional Center Director and MAP Coordinator should determine who in the Regional Center
or Satellite Office will approve the permission to occupy.
a. Occupancy prior to the execution of Form HUD-92485 will be reported to the Regional Center
Director by written memorandum.
b. The inspector will also include on the Form HUD-95379, the number of units occupied prior to
approval, as well as the date occupancy took place.
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11. Additional duties of the `inspector:
a. Advises the Architect administering the construction contract on HUD requirements;
b. Reviews the Architect's job log;
c. Reviews copies of the Architect's decisions;
d. Reports on project construction progress to the CM on Form HUD-95379;
e. Notifies the Architect and the contractor if an identity of interest exists between the owner and
the contractor, or if it is determined that there are any essential variations in the cost of the
work installed, materials stored and the request for construction advances recommended by the
Architect; and
f. Conducts interviews with an appropriate sampling of the laborers and mechanics engaged and
records interview information on Record of Employee Interview, Form HUD-11, in connection
with wage and labor compliance in the construction of the project.
12. Construction record. From the initial construction start through final inspection, the inspector shall be
responsible for maintaining a record of construction that includes minutes of the pre-construction
conference as well as reports of required guarantee inspections. The inspector shall keep a record
binder when the CM first assigns the project or may elect to expand the project record binder to include
inspection reports. All forms, reports, decisions and documents relevant to construction or inspection
reporting shall be recorded in the binder in chronological order. The journal shall be on the left side of
the binder and forms and documents on the right. The forms and documents listed below shall be
included in the Construction Inspection Record Binder, when applicable.
a. Drawings and specifications: Sets 1, 2, and 3 referenced in journals though filed elsewhere
(record the storage location of set 1 and use of 2 and 3).
b. Off-site drawings and specifications (referenced in journal).
c. Construction Contract, Forms HUD-92442M.
d. Owner-Architect Agreement.
e. Progress schedule.
f. Contractor's and/or borrower's Cost Breakdown, Form HUD-2328.
g. HUD Representative's Trip Report, Form HUD-95379.
h. Contractor's Requisition, Form HUD-92448.
i. Change Orders Form HUD-92437, AlA G710, and Architect's supplemental instruction or
equivalent.
j. Letters, memoranda, notes, and worksheets.
k. Journal of Architectural Actions (if separate binder).
l. Surveyor's Report, Form HUD-91073M (final and others, if requested).
m. Permission(s) to Occupy, Form HUD-92485.
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n. Record of established escrows including amounts escrowed and a complete list of unfinished
construction items, record of call back inspections and recommendations for monies to be
released.
13. Projects of Insurance upon Completion. The inspector will report the percentage of completion of
the project on Form HUD-95379 at the end of each month. This percentage is an approximation for
general information and is not used for disbursement.
14. Off-site inspection. The inspector checks all off-site construction for conformity with the terms of
the contract and reports work progress by percentages on Form HUD-95379. Completion is
reported on Form HUD-92464.
E. Reporting and dealing with serious construction problems. HUD Offices must identify and report, by
electronic mail, to the Regional Center Director and MACOD all insured multifamily projects under
construction or in the guarantee period that have serious construction defects or other serious
construction related problems. This information will be used to reply to inquiries, as an "early
warning system" on troubled projects, and to determine if assistance by the HUD Office is
necessary.
1. The inspector must identify all construction problems that may delay completion or lead to
foreclosure or assignment of the mortgage to HUD by using Form HUD-95379, HUD
Representative’s Trip Report.
2. The CM must prepare a referral memorandum to the Regional Center Director when:
a. Work stops for 20 calendar days;
b. There are slow payments or non-payments to the general contractor and/or subcontractors;
c. Contractor abandons the job;
d. Contractor, owner or Architect changes during construction:
e. Correction of any construction deficiency is not started within 30 days of the first notification
to the contractor; or
f. Contractor can't or won't correct any construction defect or latent defect.
3. The referral memorandum must include full details of the construction related problem, including:
a. A copy of Form HUD-95379, which identifies the problem.
b. The inspector's opinion of the cause and recommendation for correction.
c. A report of action by the CM and/or other HUD Office staff.
d. A report of actions by the owner, Architect, contractor, mortgagee and bonding company
(when appropriate).
e. A plan of action to be undertaken by the HUD Office if the mortgage is assigned to HUD
during construction or foreclosure is initiated by the lender.
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4. Only the initial report is required unless the Regional Center Director requests further action or
follow-up by the HUD Office.
5. For complete instructions on handling problems before final closing, see Appendix 12D.
12.4
Architect’s Duties in Administering Construction Contract
The Architect shall:
A. Provide services in accordance with the Owner-Architect Agreement.
B. Have no identity of interest with the owner or contractor. An identity of interest is defined in the HUD
Amendment to the B108, Owner-Architect Agreement.
C. Ensure that construction is carried out in accordance with the contract documents, including:
1. Restrict materials, products and equipment to those specified.
2. Restrict all deviations to those substantially consistent with the original design concept including
form, color, and texture.
3. When arriving at the net amount due on every requisition, compare the cost of the work and
materials with the cost to complete the project. Current and previous payment must relate to the
total cost for completion.
4. Restrict substitution of items of a different design or size from those specified to those that are
equivalent in utility (i.e., durability, quality, and ease of maintenance).
5. Restrict substitution of any material differing in composition or appearance from the one specified
to one which is equivalent in its attributes (i.e., character, quality, durability and ease of
maintenance).
6. Keep a log on the site that is readily available to the mortgagor and HUD representatives.
D. Architect's supplemental instructions. The architect administering the construction contract may issue
field orders using AIA Document G710, Architect's Supplemental Instructions, or a similar form.
1. The architect must send a copy of each supplemental instruction to HUD, although prior approval
by the lender and HUD is not required.
2. Supplemental instructions must not involve a change in contract sum or contract time.
3. Supplemental instructions may be used to:
a. Direct the contractor to bring construction into compliance with the contract documents.
b. Interpret or clarify the contract drawings and specifications.
c. Order minor changes in the work, not involving cost.
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d. Accept specified equivalents.
e. Record other "field orders" that are not construction changes.
E. The Architect administering the construction contract is responsible for reporting in writing the results
of periodic visits to the construction site. The Architect's log should provide information regarding
assessment of the progress of the work and a record of the actions taken to insure that the work is
being accomplished in the best interests of all the parties.
1. The American Institute of Architects (AIA) Document G711, Architect's Field Report, may be
used for the log.
2. A log of each visit should show, at a minimum, the following:
a. Date of inspection.
b. HUD project identification and location.
c. Time, weather, and temperature range.
d. Estimated percent of completion.
e. Work in progress and conformance with the contractor's progress schedule.
f. Persons present at work site.
g. Observations and items to verify.
h. Information or action required.
i. Firm name and signature.
12.5
Architect’s Adequacy
The Architect's administration of the construction contract is covered by the Owner-Architect Agreement
and by the General Conditions of the Contract for Construction, AIA Document A201. The HUD
inspector is responsible for determining the adequacy of the Architect's administration, which
determination will not be based just on the number of visits or the length of time spent by the Architect on
the job, but on whether the construction complies with the contract documents based on the Architect's
observations.
A. Deficient administration. If the Architect does not report all observed non-compliances with contract
documents and unacceptable performances by the contractor and pursue all avenues to obtain
compliance with the contract, then the Architect's administration of the construction contract will be
considered deficient. The Architect will not be responsible for actual construction, construction means,
methods, techniques or other related responsibilities of the contractor. However, on the basis of
on-site observation as the owner's representative the Architect must keep the lender, owner and HUD
informed of the progress of the work and endeavor to protect the owner and HUD against defects and
deficiencies in the construction.
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B. Reasons for termination of services. Inadequate performance, undue delay, misrepresentation or
failure to act on the part of the Architect or the Architect’s associates and employees shall be reason
for the termination of the Architect's services on the project and may adversely affect the firm's
acceptability on future projects.
C. HUD office actions. The HUD inspector shall bring to the attention of the Architect specific areas in
which services are considered deficient. Sufficient time and appropriate assistance shall be given to
obtain necessary compliance.
1. When the Architect's performance is first observed as deficient, in addition to the HUD
Representative's Trip Report, Form HUD-95379, the inspector shall also prepare a written
memorandum to the CM of the deficiency and advise of any planned actions or assistance. The
memorandum should recommend that future requests for Architectural inspection fees be
disallowed until performance improves to an acceptable level.
2. An immediate follow-up by the CM is always required. Conferences with the inspector and the
Architect should be arranged and a target date established for the Architect to obtain compliance.
The CM shall inform the Regional Center Director of current problems and of established target
dates for corrections. Deficiencies related to misrepresentation, undisclosed identity of interest
and known illegal kick-backs should be immediately referred to the local HUD Office of General
Counsel with a copy to the Regional Center Director. The local HUD Office should clearly
document all actions.
D. Request for contract termination. When compliance with the contract cannot be obtained within 30
days, the Regional Center Director shall request termination of the Architect's contract in accordance
with the provisions of the AIA Document B108 Owner-Architect Agreement. Upon termination, the
Architect shall be entitled to only the prescribed portion of the fee determined by the percentage to
which construction was completed on the date that the Architect was removed from the project. The
Regional Center Director has full authority to secure acceptable performance.
E. Contract termination. The owner will hire an independent Architect who is acceptable to all parties to
continue the administration of the project construction documents. The HUD inspector does not
assume the Architect's responsibility.
12.6
Completion Inspections
A. Substantial completion. The Architect will date and sign the certification on Form HUD-92485,
Permission to Occupy, for that part or for all the work that is sufficiently complete, in accordance with
the contract documents, and may be occupied for the use intended.
1. The contractor must submit a punch list of items to be completed or corrected to the Architect
when the work is ready for occupancy. (See Article 9.8, AIA Document A201.)
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2. The Architect will inspect, check the punch list and modify it if necessary, and determine when the
work is substantially complete. (Dwelling units containing punch list items will not be accepted for
occupancy. However, punch list items in interior common areas and on the exterior do not
preclude occupancy.)
3. Certificate of Substantial Completion: The HUD inspector will verify on Form HUD-92485 the
date that the work, or a portion of the work, is substantially complete and suitable for occupancy.
Where the Owner/Architect Agreement and the General Conditions of the Construction Contract,
AIA Document A201, refer to a Certificate of Substantial Completion, it confirms that the
Permission to Occupy Project Mortgages, Form HUD-92485, was executed. The date of
substantial completion of the project is the date that the HUD Representative signs the Permission
to Occupy for the final building or for the portion of the work that is completed.
4.
The Contractor’s Guarantee Period commences with Substantial Completion of the Project as
defined in Article 3.B of the Construction Contract, HUD-92442M which takes precedence over
AIA Document A201, Article 9.8.4, and stipulate that warranties commence with the substantial
completion of each portion of the work.
B. Final completion inspection. The Architect and inspector will make the final inspection upon written
request of the contractor, and may do so separately.
1. The Architect must determine that all punch list items have been completed unless they are beyond
the control of the contractor (i.e.: items of delayed completion).
2. The inspector must prepare the final inspection report on Form HUD-95379 which includes:
a. Reports onsite construction completion, although there may be items of delayed completion.
b. Lists and describes any items of delayed completion.
c. Lists any offsite work and reports the percentage of completion for each.
3. The HUD Construction Manager/Coordinator will check the final inspection report to determine:
a. If unacceptable and, requires re-inspection (i.e.: the report is not considered final).
b. If acceptable, the report will be endorsed as follows:
(1) "Construction acceptably completed." (If there are items of delayed completion, add,
"subject to escrow of funds to assure completion of listed items of delayed completion.")
(2) "All offsite sewer, water, electrical and gas facilities are completed, connected and
operable, and safe, adequate, all-weather ingress and egress provided." (If offsite item
incomplete, add, "except as stated at the time of inspection.")
(3) Date and sign the report.
c. CM will prepare a memorandum for signature by the Regional Center Director transmitting the
final inspection report, which:
(1)
States the date of final completion (i.e.: the date of final inspection);
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(2)
Lists incomplete offsite work; and
(3)
Lists items of delayed completion and the estimated of cost of completion for each item.
NOTE: The escrow for items of delayed completion must not be less than 150% of the
estimate to complete and must not exceed 2% of the mortgage. Work must be completed
within the time specified in Form HUD-92456M, Escrow Agreement for Incomplete
Construction, but not more than 12 months from the date of the final HUD inspector’s trip
report.
C. Guarantee inspections. Inspections to ensure correction of latent defects (defective or nonconforming
work not observed during construction) or to check any item of delayed completion will generally not
be required or expected to be performed by the inspector. HUD has the option of requiring such
inspections on particular transactions. For those transactions where such inspections are requested by
HUD, they should be performed within 1 year of the date of final completion and the following
requirements will apply:
1. The CM/Coordinator will schedule guarantee inspections as follows:
a. The first inspection must be within 9 months of final completion and should provide for
inspection of the entire project.
b. Other inspections may be necessary to assure inspection of seasonal items such as heating and
landscaping.
c. The last inspection must be not later than the 10th day of the 12th month to check previously
reported defects and their correction, and to identify any additional defects.
d. The nine and twelve month warranty inspections are to be attended by the Architect, Owner
and General Contractor. Copies of the Architect’s Field Reports for these inspections are to be
forwarded to both HUD and the Lender.
2. The Architect must report each guarantee inspection on Form HUD-95379, including:
a. If work is acceptable, state, "All observable work acceptable at the time of this inspection."
b. If unacceptable, list latent defects.
(1) Describe each item.
(2) Recommend method of correction.
(3) Estimate current cost of correction.
c. Check any item of delayed completion and list complete and uncompleted items under a
separate heading.
d. Note any improper maintenance or casualty damage under a separate heading.
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Insurance of Advances and Related Matters
A. General.
Insurance of advances is the process of releasing insured mortgage funds and other funds necessary for
the construction, acquisition and/or refinancing of the project. The following general criteria apply to
the advancing of such funds.
1. All escrowed funds for on-site improvements (with the possible exception of grant/loan proceeds
furnished by a government agency or instrumentality or tax credit equity proceeds) must be
disbursed before mortgage proceeds. See Chapter 14 for instructions on the pro-rata disbursement
of tax credit equity proceeds. EB-5 Investments must be funded in advance, in the same way as
other equity sources, and are not eligible to be disbursed on a pro-rata basis. .
2. The amount of construction funds approved and advanced for insurance must be consistent with
construction progress as approved by the HUD Field Representative.
3. Other mortgageable items must be adequately documented with bills and/or receipts before funds
can be approved and advanced for insurance.
4. The amount advanced for construction items must be adjusted for a 10% holdback until 50%
completion then reduced per Section 12.15.A.3 below.
5. The final amount approved for insurance must be supported by certified costs recognized in the
cost certification review. Projects that are exempt from the cost certification process can submit a
copy of their final Sources and Uses Statement prepared by the allocating State Housing Finance
Agency for HUD’s review of the final sources and uses amounts.
6. The Application for Insurance of Advance of Mortgage Proceeds, Form HUD-92403, is initiated
by the mortgagor. The initial and final advances must be submitted by the mortgagee to HUD for
review and approval. Interim advances are approved by the mortgagee, based upon the HUD
Inspector’s approval of the construction amount. The approved Contract Administrator must sign
forms HUD-92403 and HUD-92448 in the Authorized HUD Official signature block.
a. For the initial and final advances, the PC Director must sign Forms HUD-92403 and HUD92448, in the following spaces:
(1) Under Authorized HUD Official for Form HUD-92403, and
(2) Under Director, Housing Production for Form HUD-92448.
b. For the interim advances, the lender (by either the lender’s underwriter or construction loan
administrator) must sign Forms HUD-92403 and HUD-92448 for HUD, in the same spaces as
in 6.a (1) and (2) above.
7. Supporting materials to Form HUD-92403 include supporting bills/receipts and Form HUD92448, Contractor’s Requisition, if requesting construction funds.
8. Please see the FHA Multifamily Program Closing Guide for additional requirements related to title
and survey matters.
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B. Lender’s role in processing HUD-92403 includes:
1. Complete the application indicating:
a. Amount requested by mortgagor;
b. Approximate disbursement date;
c. Amount to be advanced from mortgage proceeds;
d. Amount disbursed from mortgagee’s front money escrow, if any; and
e. Total loan proceeds disbursed including the current request.
2. Submit the initial and final application to HUD for review and approval.
3. Process and approve interim advances.
4. Ensure clear title before advancing the approved disbursement.
5. Notify HUD in writing when clear title does not exist or is impaired.
C. Stages of Advances.
In cases involving insurance of advances, HUD and the lender’s processing of the advance is divided
into the following stages:
1. Initial advance. Refers to the first application and coincides with the initial endorsement of the
mortgage. The initial advance will be reviewed and executed by the HUD mortgage credit analyst.
The lender should submit Form HUD-92403, Application for Insurance of Advance of Mortgage
Proceeds, with supporting documentation for HUD approval.
2. Interim advances. Interim advances are subsequent applications up to completion of the project
and will be processed and approved by the lender.
3. Next to Final Advance. When HUD is in receipt of the contractor’s certification and the consent
from both the mortgagor and surety, if any, the final 5% of the construction holdback is released.
Note: This procedure only applies to non-identity of interest contractors or where the contractor's
identity of interest in the project ownership is less than 5%.
4. Final Advance. This refers to any remaining balance of mortgage proceeds at final endorsement
and takes into consideration funds necessary to set up the escrows for “Items of Delayed
Completion” and “To Be Paid in Cash Items” and will be processed by HUD. In addition to the
Form HUD-92403, the lender must submit a copy of Form HUD-92451 Financial Record of
Mortgage Loan Transaction, which reflects releases to the various payees during the construction
period.
D. Instructions for Approval of Initial/Interim Advances can be found in Appendix 12A.
E. Contractor’s Monthly Requisition and Related Matters. See Appendix 12B for instructions on
completing Contractor’s Requisition, Form HUD-92448, and related matters.
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F. Next to Final Advance. The lender may request the next to final advance when construction is
acceptably complete, even if there are items of delayed completion.
1. It may provide for the release of the contractor’s holdback provided the conditions in Section 12.15.D
have been met. The amount approved for release will be based on the cost certification review and
HUD-approved amount (or where the cost certification is exempt, an operating statement is reviewed
instead). The amount approved for release will also consider items of delayed completion. A special
condition will be included in the Firm Commitment in the event that the cost certification is exempt
and an operating statement will be reviewed instead.
2. The balance of the off-site escrow may be released upon HUD approval provided:
a. The off-site sewer, water, electrical and gas facilities are completely installed and connected; and
safe and adequate all weather facilities for ingress and egress are provided.
b. All other required off-site construction, if any, is completed.
c. Otherwise, completion is to be assured by a cash deposit in an amount equal to 150 percent of
the HUD estimate of the cost of such remaining off-site construction.
G. Final Advance. The Application for Insurance of the Final Advance will request any remaining
balance of mortgage proceeds and ensures that:
1. The mortgagor’s cost certification has been approved and the maximum insurable mortgage
amount determined using Form HUD-92580, Maximum Insurable Mortgage.
2. Form HUD-92403 is accompanied by a completed Form HUD-92448, with required Contractor’s
Prevailing Wage Certificate, if the contractor’s holdback has not been previously disbursed. Refer
to Section 12.15.E for instructions on releasing the contractor’s holdback.
3. The sum to be approved for the advance is the balance of the mortgage proceeds, based on the
maximum insurable mortgage on Form HUD-92580. Refer to Section 13.12 for instructions on an
advanced amortization adjustment, if any.
4. An escrow is established for incomplete or delayed construction items under the provisions of
Form HUD-92456M, Escrow Agreement for Incomplete Construction (formally Escrow Deposit
Agreement for items of delayed completion).
5. Form HUD-92023M, Request for Final Endorsement of Credit Instrument, or Form FHA-2453,
Commitment to Insure upon Completion, must have been submitted and reviewed.
6. Setup the escrow for the mortgagor’s unpaid construction costs under the provisions of Form
HUD-92476.1M, Escrow Agreement for Non-Critical, Deferred Repairs, (formally Escrow
Agreement for Unpaid Construction Costs, Repairs or Needs Assessment Repairs).
H. Keeping the mortgage in balance.
Soft cost overruns such as interest, taxes, mortgagee insurance premium (MIP), and insurance that
result from a construction delay before completion of the project and which is the fault of the general
contractor, (i.e., due to poor performance), are funded according to the liquidated/actual damages
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Document page 385
clause in the construction contract. This clause is not intended to penalize the contractor, but to
provide a source of funds for the increased soft cost. When the interest allocation is near exhaustion
(i.e. when the balance after several draws is $1,000 or less) the lender must notify HUD immediately,
and HUD will advise the lender of the following procedures:
1. When the interest allocation is near exhaustion, have the Architect and the HUD inspector estimate
an expected completion date.
a. Compute the minimum liquidated damages for the period between the completion date
specified in the construction contract, as adjusted by approved change orders, and the
estimated completion date.
b. When the interest allocation has been exhausted, the non-profit developer’s fee, if applicable,
or the working capital escrow should be used to keep interest current.
c. Transfer the computed liquidated damages amount from column I, Construction, to Column G,
Carrying Charges and Financing, on Form HUD-92451 and:
(1)
Allocate the full amount to interest, initially.
(2)
Funds may be used for MIP, taxes, or insurance payments, if requested, after the funds
for these line items and non-profit developer’s fee, if applicable and working capital
escrow are exhausted. However, funds transferred from the construction account may be
used to cover only the cost of those items attributable to the period in paragraph 1 above,
specified in the construction contract and the assumed completion date.
2. Notify the borrower, contractor, HUD and the surety, if any, by certified mail of the amount and
the reason for the transfer.
3. Require written acknowledgment from HUD and surety, if any, before transferring funds.
4. The amount of transferred funds must be reflected on subsequent Forms HUD-92448 as a decrease
to item 7, Sum of Cost Breakdown Items Plus Inventories of Materials.
5. After review of the cost certification documents, if the full amount of transferred funds was not
needed to cover the cost of interest, MIP, taxes, and insurance attributable to the period identified,
the balance will be transferred back to the construction account.
6. In processing Form HUD-92448, before releasing the general contractor’s holdback, make
adjustment for the lesser of actual or liquidated damages determined in the cost certification
review.
7. This procedure should be used only if, in consultation with the Regional Center Director, it is
determined that the problems causing the delay will be remedied within the near future.
In the event the project continues to sustain an imbalance between sources and uses of funds, the
Regional Production Office will inform the Regional office of Asset Management about the issues
and the status of any release of IOD funds.
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Chapter Index / Section Index
Construction Change Orders – General HUD Duties
A. General instructions. Construction contract changes to the scope of contract work, contract price or
contract time must be requested by the mortgagor through the lender on Form HUD-92437, Request for
Construction Changes and must be signed by the mortgagor’s Architect, the mortgagor, the general
contractor and the lender before HUD reviews the change order for approval.
1. HUD review and approval. Each HUD discipline as appropriate, including Architecture, Cost,
Appraisal, Mortgage Credit and the HUD Inspector may review and make a recommendation to
the HUD CM.
2. Change orders will be approved only when they are necessary, are for betterment or an equivalent.
The following information should appear on the face of the change order:
a. Classification (necessity, etc.);
b. Qualification for payment from the contingency reserve and from the developer’s fee for nonprofit borrowers; and
c. Whether the change order results from error, omission or negligence on the part of the
Architect, contractor or mortgagor.
3. Change orders submitted after the final HUD Representative’s Trip Report will not be approved,
except where:
a. The change order pertains to “Items of Delayed Completion,” or
b. Written approval is given by the Regional Center Director.
4. Surety approval must be secured in writing before approving any change or aggregate of changes that
increase the contract price by 10% or more. Surety consent is not required where the project’s
assurance of completion is by a cash escrow or letter of credit.
5. Working capital new construction contingency. The working capital escrow requirement for new
construction transactions is 4% of the mortgage amount, half of which (or 2%) is used as new
construction contingency to fund necessary approved change orders, construction cost overruns
and other cost overruns. At the borrower’s request any unused portion is released after Final
Endorsement.
B. Other change order policies.
1. Changes must be accurately reported and accounted for pursuant to U.S. Criminal Code, Section
1010, Title 18, U.S.C.
2. Procedures for changes outlined here are not to be used to alter the intent of the contract
documents or to lower the quality or value of a project.
3. HUD does not initiate any change but may require it as a condition of approval in connection with
a change proposed by the Architect, mortgagor or contractor.
4. All changes must be approved in writing by the lender and HUD before they are made.
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5. Any change that is made without formal approval, even though tentatively agreed to as technically
acceptable, must be recorded by the HUD Inspector as a noncompliance until the Form
HUD-92437, Request for Construction Changes - Project Mortgages, is approved. The payment of
future insured advances may be affected until corrected.
C. Change order classification.
1. Necessary changes (which the Construction manager or architectural designee must document) are those
that arise from:
a. Latent conditions that differ from conditions defined by the construction documents;
b. Changes in the applicable state or local codes, ordinances, etc. after:
(1) Initial closing for insured advances; or
(2) Firm Commitment for insurance upon completion.
c. The Architect’s errors or omissions.
d. Damage to completed construction.
2. Betterment changes are those that are economically justified. They must either:
a. Increase net income;
b. Reduce long-term project maintenance and/or operating expenses; or
c. Otherwise enhance the mortgage security.
3. Equivalent changes are those proposed because:
a. A specified item is not readily available and the substitution provides equivalent or better
utility and performance, or
b. The proposed substitution reduces the contract price but provides equivalent or better utility
and performance.
D. Additive change orders. The lender must not give any explicit or implied assurance to the borrower or
the contractor that an increase in the insured mortgage amount will be granted when construction
changes are approved.
1. Lender must require the borrower, except for “necessary” change orders on substantial rehabilitation
projects, to escrow funds with the lender for any additive change order where HUD first estimates that
the aggregated change orders equal or exceed a $5,000 increase in the construction contract price, and
for all subsequent additive change orders. Non-profit borrowers may use the developer’s fee to fund
additive change orders.
a. Excess mortgage proceeds, if available, may be used to fund the escrow for necessary and betterment
change orders. However, any excess mortgage proceeds used to fund the escrow for contractor
estimated costs in excess of HUD estimated costs, or HUD estimated costs in excess of contractor
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estimated costs, may not be disbursed until final closing. [Cross Reference Section 8.14.K and
Appendix 12A para. D]
b. The lender may accept a third party letter of credit instead of a cash deposit, subject to the
lender agreeing to provide the cash equivalent, where the letter of credit is not immediately
honored.
c. The lender may recognize the cost of third party paid change orders at cost certification, where
there are available mortgage savings.
2. For substantial rehabilitation projects the lender must approve disbursements from the established
contingency reserve in an amount not to exceed the HUD cost estimate for necessary or betterment
change orders.
a. The lender must require an escrow for any amount that the contractor’s cost estimate exceeds
the HUD estimate.
b. The lender may authorize the use of excess mortgage proceeds, if available, to satisfy the escrow
requirement, subject to the disbursement limitations in paragraph 12.8.D.1.a above.
c. After substantial rehabilitation work is complete and approved by the HUD Inspector and subject to
lender and HUD approval, the borrower may elect to apply funds remaining in the contingency
reserve line item to do:
(1) necessary, further improvements, betterments or upgrades to the property,
(2) an initial deposit to the Reserve for Replacement account, or
(3) a reduction to the principal mortgage balance.
3. The lender must approve the following forms for mortgagor’s application of funds for completed
additive change orders:
a. Form HUD-92464M, Request for Approval of Advance of Escrow Funds, where an escrow is
used, which must be submitted to HUD for approval.
b. Form HUD-92403, Application for Insurance of Advance of Mortgage Proceeds, where a
rehabilitation project’s contingency funds or a non-profit’s Developer’s fee or excess mortgage
proceeds are to be used.
E. Deductive change orders. Where the HUD estimated decrease in contract price for any aggregation of
change orders:
1. Remains less than 2-1/2% of the contract price, the lender must reduce the Contractor’s “Final”
Requisition, Form HUD-92448, by the appropriate amount.
2. Equals or exceeds 2-1/2% of the contract price and for all subsequent deductive change orders
regardless of the amount, the lender must:
a. Reflect the decrease in the Contractor’s Requisition, Form HUD-92448, item 8.
b. Reduce the original mortgage amount at cost certification, where required.
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F. Changes that adversely affect property income are a basis for change order rejection, except where it is
a necessary change order and the situation is unavoidable. HUD staff must adequately document the
analysis and decision showing that the change resulted in less property income.
G. Extension of contract time.
1. The lender may approve an extension only where:
a. The delay is beyond the contractor’s control (e.g. strikes, differing site conditions, bad weather
exceeding the average for the season, etc.) and it is documented or associated with an approved
change order,
b. The extension request is submitted within the limit provided by the contract and the general
conditions for delays beyond the contractor’s control, and submitted concurrently with any
requested changes in the work, and
c. The request is accompanied by a Surety’s written consent. There is no consent requirement where
the project’s assurance of completion is by a cash escrow or letter of credit.
2. The lender may require funding for the increased cost for overhead, interest, taxes, insurance, MIP
and contractor’s general requirements by use of a cash escrow, excess mortgage proceeds, or nonprofit’s developer’s fee, if applicable, or from contingency reserve.
3. HUD may enforce liquidated damages in accordance with the terms of the construction contract
(Form HUD-92442M).
4. Required documentation. Within 21 days of the date a construction delay occurs, the contractor
must document the delay with the Architect and include:
a. Date of occurrence and number of calendar days it covered;
b. Effect on construction progress;
c. Cause of the delay. If the cause is of a continuing nature, submit the extension request when the cause
ceases, but still record the initial date of occurrence and its effects on construction; and
d. The extension request must include the written consent of the Surety and conform to AIA
Document A201, Article 8.3.
H. Changes to items of delayed completion are the only construction contract changes that the HUD
Representative may approve after project completion. All others require the Regional Center Director’s
consent.
I. Emergency changes.
The only time a change can be made without prior written approval of the lender and HUD is in
emergencies that:
a. Endanger life or property; or
b. Halt construction.
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However, even then, the Architect must notify the lender and HUD and as soon as possible, submit a
Form HUD-92437.
J. Insurance Upon Completion: Construction Contract Changes, Form HUD-92437, are to be processed
in the same way as Insurance of Advance cases, except as modified below:
1. An escrow is not required for additive change orders. The borrower:
a. Must be able to provide the additional funds required, and,
b. Must not have any outstanding obligation in connection with construction other than the
insured mortgage at the time the mortgage is presented to HUD for insurance upon completion.
2. Surety approval is not required for the approval of additive change orders regardless of the
percentage of contract increase.
K. Changes to offsite construction must be requested by letter or other acceptable format with the
information required by Form HUD-92437 used as a general guide, although the actual form must not
be used.
L. Other changes. Changes necessitated by error, omission or negligence of the Architect, owner, or contractor
must be recorded by the HUD architectural staff or inspector, on Form HUD-92437, including.
1. The reason for the determination; and
2. Confirmation that the cost of the changes must not be included in the mortgage amount.
12.9
Change Orders – Inspection Instructions
A. General procedure.
NOTE: For projects involving insurance upon completion, references here to "contract requirements"
or "contract documents" include the conditions and provisions of the commitment if there is no
construction contract.
1. Any contemplated changes are first discussed among the Architect, contractor, owner, and HUD
inspector.
2. HUD inspector will make a preliminary determination of technical acceptability before the change
is submitted for approval to the lender and the HUD Office. (This neither commits HUD to the
change, nor relieves the Architect or the contractor of having to submit Form HUD-92437.)
3. All onsite changes to construction documents and requests for time extensions must be submitted
for approval on Form HUD-92437, Request for Construction Changes - Project Mortgages.
a. Required attachments for physical changes are:
(1) Appropriate modifications to the contract drawings and specifications;
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(2) Architect's statement that the change:
(a) Conforms to the original intent of the contract drawings and specifications;
(b) Is necessary to overcome an impediment to construction, or is an addition desired by
the owner.
(3) Backup documentation for the amount requested consisting of itemized quantities and
costs.
b. The form must be signed by the:
(1) Borrower,
(2) Contractor,
(3) Architect (if an Owner-Architect Agreement is in effect), and
4.
5.
6.
7.
(4) Authorized official for the lender.
All offsite changes to construction documents and requests for time extensions must be:
a. Requested in a letter or other format acceptable to the Regional Center/PC, but not on Form
HUD-92437.
b. Documented and processed the same as on-site changes.
HUD will promptly review all requests submitted so delays will not affect construction or
contractor requisitions.
a. Processing should normally take no more than 5 workdays and is directed by the CM.
b. All construction change requests must be reviewed, signed, and dated by the CM.
Voiding changes. If an approved change is not made, it must be nullified by a Form HUD-92437
restoring the drawings and specifications to the status prior to the change request or to a status
acceptable to HUD.
Unapproved changes. When there are unapproved changes in the construction, the HUD inspector
must modify the amount of the contractor's requisition to cover:
a. The non-compliance (any change that has not formally been approved on Form HUD-92437),
and
b. Construction removal that may be required if the unapproved change does not receive approval.
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12.10 Change Orders – HUD Architectural and Cost
Instructions
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Change Orders – HUD Architectural and Cost Instructions
A. Architectural. The HUD construction analyst will review all requested changes for technical
acceptability.
B. Cost.
1. Construction changes:
a. The HUD cost estimator will produce a cost estimate for each construction change request
submitted by the mortgagor by applying current data to accepted or amended change order
quantities; include amounts for general requirements and builder’s overhead and profit using the
percentage of each from Section G of Form HUD-92264 that was approved at Firm review.
b. Compare the estimate with the mortgagor’s estimate and, if reasonable, use the mortgagor’s
figure. Otherwise use the HUD estimate.
c. Complete the cost entries on Form HUD-92437 and forward the completed form to the HUD
mortgage credit examiner and/or the appraiser, if applicable.
2. Approved time extensions:
a. Calculate the additional general requirements cost due to the extension of time.
(1)
Divide the cost of general requirements from the contractor’s approved Form HUD-2328
by the number of months estimated for construction from Section G of Form HUD-92264
approved at Firm commitment. Sixty-five percent of this amount is the estimate per
month of additional general requirements.
(2)
Use one quarter of the monthly estimate per week.
(3)
There is no cost effect for extensions of time for less than one week.
b. Complete the cost entries on Form HUD-92437 and forward the completed form to the HUD
appraiser and HUD Underwriter.
12.11
Change Orders – HUD Appraisal and Mortgage Credit Instructions
A. Appraisal.
1. The HUD appraisal staff must review all requested changes that may affect marketability,
value, income, or maintenance or operating cost; and identify and explain any estimated
increase or decrease in net project income on the reverse of Form HUD-92437.
2. The HUD appraiser must forward a Trial Form HUD-92264 and Trial Form HUD-92264-A
reflecting the new data for Mortgage Credit re-determination of the maximum insurable mortgage.
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B. Mortgage credit.
1. Processing.
a. If the borrower’s or contractor’s estimate for the change order exceeds HUD’s estimate, the
difference must be escrowed with the lender. Excess mortgage proceeds, if available, may be
used to satisfy this requirement. Conversely, that portion of HUD’s estimate which exceeds the
borrower’s or contractor’s estimate must be restricted and held until final endorsement to
ensure funds to complete the project.
b. Process the cost and appraisal findings and show the cumulative effect on cost of all approved
change items.
c. Use Sections 12.8.D and 12.8.E for additive and deductive change orders.
d. Recalculate the maximum insurable mortgage when any approved construction change or
changes adversely affect net income, e.g., a change that causes an increase in project operating
costs or a reduction in project income.
(1)
The appraiser completes a Trial Form HUD-92264 with an updated income and
expense analysis.
(2)
Re-determine the maximum insurable mortgage.
(3)
If the re-determined mortgage is lower than the original mortgage amount, as a
condition of approval of the change order, indicate in item 3b of Form HUD-92437 that
subsequent Contractor’s Requisitions, Form HUD-92448, must be reduced by the
greater of:
(a) The difference in mortgage amounts;
(b) The net increase in costs resulting from acceptable construction changes.
e. Extensions of time.
(1) Architectural and cost technicians are responsible for determining whether the delay was
beyond the contractor’s control and, if so, the length of the approved time extension.
(2) Calculate the cost increase due to the extension:
(a) Compute daily rate for interest, taxes and insurance by using estimates in Section G
of Form HUD-92264 and multiply these rates by the approved time extension.
(b) An additional year of MIP will be required if the approved time extension, when
added to the estimated construction term plus the 2 months included in Section G
of Form HUD-92264 plus previously approved time extensions, would extend the
term past twelve, twenty four or thirty six months, as applicable.
(c) Add the additional general requirements, if any, noted by the Cost branch on the
change order request.
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NOTE: Only Item (c) above amends the construction contract price on Form HUD92437.
(3)
Determine the source of funds for any increase due to the extension, e.g. cash, excess
mortgage proceeds or non-profit’s developer fee, or contingency reserve funds.
(4) Requests for release of excess mortgage proceeds or contingency reserve funds set aside
to fund time extensions are submitted on Form HUD-92403.
(5) Releases from a cash deposit are made using Form HUD-92464M.
(6) These funds may be released only after the account for the soft cost item(s) being
requested has been exhausted on Form HUD-92451, Financial Record of Mortgage Loan
Transaction.
2. Requests for disbursement of contingency reserve funds, working capital construction contingency
funds and non-profit’s developer fee for completed change order items are made on Form HUD92403. All requests:
a. Must be accompanied by a certification by the borrower’s supervisory Architect and the HUD
Inspector that all the work covered by the change order has been acceptably completed in
accordance with contract documents.
b. Must include the borrower/borrower’s certification relative to payment to the contractor
contained on Form HUD-92464M, Request for Approval of Advance of Escrow Funds.
c. Must include the criminal certification contained on Form HUD-92464M for certifications
made in paragraphs a and b above.
d. Are subject to a 10 % holdback.
3. Change orders funded from excess mortgage proceeds. Excess mortgage proceeds may be used to
fund either necessary or betterment change orders.
a. These funds may be used to fund HUD’s estimate of increased costs as well as any
portion of the contractor’s estimate which exceeds the HUD estimate. The portion which
exceeds HUD’s estimate must be restricted until final endorsement.
b. Funds are released in the same manner as contingency reserve funds.
4. Releasing Cash Deposit. The borrower must submit, through the lender, Form HUD-92464M
when construction covered by a cash deposit is complete and acceptable to HUD.
a. The borrower’s supervisory Architect and the HUD inspector must certify on Form HUD92464M that all work and materials covered by the change order are satisfactory and consistent
with contract drawings.
b. If construction costs were paid in full with other than the cash escrow or excess mortgage
proceeds before submitting the disbursement request to HUD for approval, the borrower
must submit a receipt of payment signed by the general contractor.
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Chapter Index / Section Index
Document page 395
c. If construction costs will be paid after HUD’s approval for the release of the funds
deposited for the construction change, before the next Form HUD-92403 is submitted, the
borrower must submit a receipt of payment signed by the general contractor.
5. Change Order Summary Sheet showing cumulative cost of all executed change orders should
contain, at least:
a.
b.
c.
d.
e.
f.
The date the change order was signed by the borrower;
The date HUD received the change order;
The date the Mortgage Credit branch processed the change order;
The borrower’s or contractor’s estimate of cost for the change order;
HUD’s estimate of cost for the change order;
The amount of change orders to be funded from contingency reserve, working capital
construction contingency, non-profit’s developer fee, or excess mortgage proceeds;
g. The required cash escrow deposit, if any;
h. The HUD percentage of cost increase or decrease.
12.12
Labor and Fair Housing and Equal Opportunity (FHEO)
A. Wages
1. Payrolls. Contractor payrolls are submitted directly to the HUD Labor Standards and Enforcement
staff a minimum of once a month.
2. On-site interviews. The HUD Construction Manager forwards all original copies of Form HUD11, Record of Employee Interview, which are submitted by the HUD inspector to the HUD Labor
Standards and Enforcement Staff.
B. Labor violations. Advise the Labor Standards and Enforcement Staff of continuing minor infractions
that cannot be resolved or of any identified or suspected major violations. Labor standards
enforcement staff shall provide written clearance to Housing and OGC in connection with final closing
confirming either that there are no outstanding issues and the project may proceed to closing without
condition, or that outstanding issues remain and the closing may proceed conditioned on the deposit to
the U.S. Treasury of funds sufficient to meet any wage restitution and/or liquidated damages that have
been or may be found due. Final closing may not occur without receipt of this written guidance from
labor standards enforcement staff.
C. FHEO noncompliance. Advise the local HUD Director of FHEO of continuing minor noncompliance
that cannot be resolved or of any identified or suspected major noncompliance.
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12.13 Surveys
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Surveys
Surveys must be by a licensed surveyor and show the exact location of on-site improvements, including
utility lines and easements. Please see the FHA Multifamily Program Closing Guide for additional
requirements related to survey matters.
A. The contractor must give the owner and HUD surveys:
1. At any time the owner or HUD requires, and
2. When construction is complete (“as-built” survey).
B. The inspector, when uncertain of the location of construction or stored materials in relation to property
lines or easements, may ask the Architect to require a survey with the next contractor's requisition.
C. If encroachments are found, the inspector must notify the HUD Construction Manager by
memorandum explaining the conditions. (Encroachments may jeopardize the entire property as
security for an insured mortgage.)
12.14
Permission to Occupy
Permission to Occupy Form HUD-92485 must be executed by HUD before the borrower permits
occupancy of any dwelling unit.
A. Physical completion. The work, or portion thereof for which Permission to Occupy is approved, must
be sufficiently complete in accordance with the contract documents so the mortgagor can occupy or
utilize the identified portion of the work for its intended use.
1. Support facilities (utilities, disability access, vehicular access and parking, fire life-safety
equipment, etc.) must be in place.
2. The acceptability of each unit and facility for which Permission to Occupy is requested must be
confirmed:
a. Property must be inspected and Form HUD-92485 signed by the borrower, supervisory
Architect, contractor, and HUD Representative.
b. Minor items that do not preclude occupancy are permitted but must be listed as an attachment
to Form HUD-92485.
c. The contractor is fully responsible for any incomplete or improperly performed contract work
whether or not listed.
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Escrowed Funds, Letters of Credit, Deposits,
Holdbacks and Related Matters
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B. Signatures, Approval and Permission:
1. Form HUD-92485 must be signed by the borrower, supervisory Architect, contractor, lender, and
HUD representative.
2. Approval: The Construction Manager or a designated HUD staff person in the Regional Center
signs as Chief, Architecture and Engineering Section. The Underwriting Branch Chief signs as
Chief Underwriter.
3. Permission to Occupy: The Regional Center Director and MAP Coordinator will designate an
FHA Authorized Agent in the Regional Center or Satellite Office to sign the Permission to
Occupy.
C. Submission Documents. The lender must sign Form HUD-92485 agreeing with the request and stating
that insurance risks have been covered for the project. The borrower must include the following
documents with the completed Form HUD-92485:
1. A Certificate of Occupancy or equivalent permit from the governing municipal authority for all
units and facilities listed on the Permission to Occupy; and any other required permits or
authorizations;
2. An accord or certificate of property and liability insurance from the borrower's insurance company.
D. Partial Occupancy Approval.
1. Favorably consider partial occupancy of units as they become available, where vandalism could be
minimized, needed project income is provided, an earlier rent-up date could be achieved, utility costs for
occupied units can be metered separately from contractor’s utilities, etc.
2. Approve a series of Permissions to Occupy as units or facilities become available, e.g. individual
buildings on multi-building projects, or individual floors or wings on larger buildings.
3. Approve a single Permission to Occupy for all units where dictated by management
considerations, e.g. very small projects.
12.15
Escrowed Funds, Letters of Credit, Deposits, Holdbacks and
Related Matters
A. Borrower’s Application for Escrowed Funds, for HUD approval.
Form HUD-92464M, Request for Approval of Advance of Escrow Funds, must be used where the
escrow is to ensure completion of offsite improvements, additive change orders, non-critical repairs
(under the Section 223(f) program), or borrower’s unpaid construction items at final endorsement.
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1. The borrower must initiate the process by completing Form HUD-92464M. The lender must
complete the Form before submitting the disbursement request to HUD for approval.
2. The HUD inspector is required to record the percentage of acceptably completed escrow work on
the HUD Representative’s Trip Report, Form HUD-95379. The borrower will review the Trip
Report to determine the amount of funds to request for release of escrow funds that align with the
completed work. After the borrower has reviewed the Trip Report and entered information on the
HUD-92464M, the borrower must forward a copy of both Forms to the lender for their review and
completion before the disbursement request is submitted to HUD.
3. HUD will not authorize advances that exceed the documented percentage of completion less
previous payments plus a 10% retainage, until work is 50% complete. After the project is 50%
complete reduce the retainage from 10% to 5% up until 75% completion. After 75% completion
the retainage may be reduced to 2.5% until the loan reaches Final Endorsement. (This does not
apply to Section 223(f) or Section 223(a)(7) loans.)
4. Where excess mortgage proceeds are used to fund an escrow for completion of offsite
improvements, additive change orders or mortgagor’s unpaid construction items, return the
original copy of Form HUD-92464M to the depositor and retain one copy.
B. Release of letters of credit. In the event of a claim:
1. Assignment. HUD will not accept an assignment of the letter of credit to HUD from the lender.
2. Undrawn Balance. HUD will treat any undrawn balance from a letter of credit or escrow
agreement as cash held by the lender.
3. Cash equivalent. The lender must provide cash equal to the undrawn balance, if demand on a
letter of credit is not met.
C. Working Capital Deposit (HUD-92412M) escrow is established at initial closing with the lender. It is
the responsibility of the borrower to advise the lender how it plans to fund the escrow: either by cash,
a letter of credit, excess mortgage proceeds, or excess land equity, if any.
1. Purpose. The deposit is used to:
a. Defray the cost of initial marketing and rent-up including: sales and advertising, model
furnishing, and equipment and supplies essential to initial rent-up, etc.
b. Cover project expenses that are not covered by project income or the Initial Operating Deficit
Escrow in the first operating year. The project expenses include real estate taxes, permanent
property insurance premiums, mortgage insurance premium, ground rents and assessments.
c. Cover shortfalls in interest, taxes, property insurance premiums, mortgage insurance
premiums, ground rents and assessments during construction after funds available under the
Building Loan Agreement are exhausted.
d. Fund necessary change orders and construction cost overruns from the 2% new construction
contingency portion of the working capital escrow.
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2. Control and Release of Escrow. The lender controls disbursements from the escrow except where
the borrower certifies at Firm Commitment that any balance of the escrow will be applied to the
reserve for replacements or additional betterment change orders on tax credit projects. The lender,
in conducting its due diligence during initial occupancy, is required to fully document all
expenditures from the escrow. In reviewing a borrower’s request to release a partial amount of
escrow, the lender should consider the following.
a. Borrower's request for the release of such escrow funds must be by letter to the lender, rather
than on Form HUD-92403.
b. None of the escrow can be used to defray any of the hard costs of construction applicable to the
Total for All Improvements, Section G of Form HUD-92264, Rental Housing Project Income
Analysis and Appraisal (or other Firm Stage underwriting form applicable to the Section of Act
the project is to be insured under).
c. Avoid premature disbursements and unnecessary expenditures.
d. As portions of a project are ready for occupancy, a partial disbursement may be permitted for
reasonable opening expenses. However the lender must not exhaust the escrow prior to project
completion, but should retain a reasonable amount to offset funding needs through the remainder of the
construction period and thereafter.
e. The Field Office may direct that the deposit be used to cover any shortfall in interest, taxes,
property insurance mortgage insurance premiums, ground rent and assessments.
3. Final Release of Escrow.
a. The lender may release any unused balance in the working capital escrow, subject to HUD
approval, to the borrower one year after Final Endorsement where the project is not in default
and when the operations of the project have demonstrated to the Regional Center or Satellite
Office Director’s satisfaction that the project has achieved 6 consecutive months of break-even
occupancy. Break-even occupancy is defined as 1.0 debt service coverage, based on all
sources of project income including ancillary income.
b. The lender must hold this escrow until any project financial problems are resolved (e.g., has
not reached sustaining occupancy, has insufficient cash to meet project obligations and/ or high
payables, is operating at a deficit or is near default).
c. If the mortgage is in default, the lender must apply any balance of the working capital escrow
to cure a default, where a default occurs before its release.
d. The borrower will receive a refund of any remaining balance of working capital new
construction contingency at final endorsement, subject to HUD approval and after any issues
discussed in paragraph a, b, and c, above are resolved.
D. Initial Operating Deficit Deposit must be established with the lender at initial closing and is the
borrower’s responsibility to advise the lender on how it plans to fund the escrow either by cash, a
letter of credit, or excess mortgage proceeds, or excess land equity, if any.
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1. The purpose of the operating deficit escrow is to provide funding for operating expenses and debt
service when net income is not available during the initial lease up period. This escrow is not
mortgageable and the unused portion must be returned to the borrower.
2. Release of the Initial Operating Deficit Escrow. HUD will consider lender’s request using Form
HUD-92476.a-M, Escrow Agreement for Operating Deficit, for all initial operating deficit draws
during lease-up. The lender’s request must be accompanied by:
a. A review and analysis of the monthly accounting reports detailing progress on lease up as
compared to the lease up projections used in underwriting, and
b. An updated calculation of the sufficiency of the escrow. This analysis and calculation is
particularly important if the project is experiencing substantial variations from its lease up
projections.
c. Unused amounts will be released upon the lender’s request at the later of 12 months after Final
Endorsement or when the project has demonstrated to the HUD field office’s satisfaction that
the project has achieved 6 consecutive months of break-even occupancy. (Break-even
occupancy is defined as 1.0 debt service coverage, based on all sources of project income
including ancillary income.) The HUD Production Underwriter will consult with Asset
Management (AM) staff prior to approval of a release to obtain AM’s approval. Regional
Centers/ Satellites should exercise caution to be certain that monthly results are not erratic or
seasonal and that 1.0 or better debt service coverage will be sustainable after release of the
escrow funds. For garden apartment projects consisting of separate buildings, each of which is
leased up separately, HUD will consider partial releases of the operating deficit escrow as
individual buildings achieve 6 consecutive months of break-even occupancy. It is the lender’s
responsibility to fully document all expenditures from the escrow fund to ensure that funds are
used solely for project operating needs.
E. Amount of contractor's retainage and release. The retainage provides an incentive for the general
contractor and mortgagor to promptly complete the project, submit cost certification and reach final
closing.
1. Amount of retainage. The Building Loan Agreement allows for the possibility of a reduced
holdback (10%) amount as set forth in a retainage reduction rider when the project reaches 50%
completion. The rider is not a HUD form. The owner and the general contractor will create a
rider, to attach to the Building Loan Agreement, which describes how the retainage is reduced
according to the guidance below. The construction contract also provides for a 10% holdback
from the contractor's monthly payments for acceptably completed work, acceptably stored
materials, and where applicable, components acceptably stored offsite. The requirements for
reduction of the retainage after 50% completion are as follows:
a. The Contractor has no identity-of-interest with the owner that is greater than a 5% equity
interest in the ownership entity,
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b. Prior written consent from the Surety must be obtained and attached to the request for
reduction, and
c. There can be no questions regarding the contractor’s performance concerning the quality of
work, compliance with the contract and with any change orders or work in progress. The
Regional Center or Satellite Director must make the decision to reduce the retainage based on
the recommendation of HUD’s construction inspector.
d. Assuming the above conditions are met, and subject to HUD approval, the existing standard of
10% retainage will be required only until 50% completion. After 50% completion the
retainage may be reduced from 10% to 5% until 75% completion, and then may be reduced
further to 2.5% retainage until the loan reaches Final Endorsement.
2. Release of retainage for identity of interest contractors. Except as provided in paragraphs 4 and 5
below, the retainage may not be released, in whole or in part, until Final Endorsement for a contractor
with an identity of interest.
3. Release of retainage for non-identity of interest contractor. The contractor's retainage, or the remaining
balance in the retainage, may be released at the next to last advance, when requisitioned on Form
HUD-92403, Application for Insurance of Advance of Mortgage Proceeds, and subject to compliance
with the following:
a. Contractor's cost certification, where required, has been reviewed and necessary adjustments
made to Form HUD-92451, Financial Record and Mortgage Loan Transaction;
b. Contractor has disclosed its final obligations on Form HUD-92023M, Request for Final
Endorsement of the Credit Instrument;
c. All work under the construction contract has been inspected and approved by the controlling
jurisdictions and/or authorities;
d. Certificates of occupancy or other required approvals for the dwelling units and non-dwelling
facilities, where applicable, have been issued by governmental authorities having jurisdiction.
(Separate buildings for community rooms, rental offices, laundry rooms, etc., commonly
require separate certificates of occupancy.);
e. Permission To Occupy, Form HUD-92485 has been issued by HUD for all units;
f. All Davis-Bacon payroll requirements have been satisfied;
g. Surveyor's Certificate, Form HUD-91073M, and survey showing the location of all
improvements, utility easements and site utility distribution lines have been submitted to HUD,
and
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h. Retain, where applicable, an adequate amount to cover the following:
(1)
Items of delayed completion in an amount equal to 150% of the HUD representative's
cost estimate for completion,
(2)
Any owed or contested amounts indicated by mechanics, subcontractor, supplier, or
equipment lessor liens, etc.
(3)
The lesser of the liquidated damages or actual damages computed at cost certification,
and
(4)
The net effect of any negative change orders.
4. Early partial release of retainage.
a. After 90% contract completion, the Regional Center Director may release part of the general
contractor's retainage and suspend further withholding of retainage from payments due, where:
(1)
The contractor has no identity of interest or the contractor's only identity of interest in
the project ownership is less than 5%;
(2)
The contractor, mortgagor and mortgagee request the early release of the holdback and
attach the request to Form HUD-92403, Application for Insurance of Advance of
Mortgage Proceeds; and
(3)
Prior written consent from the surety, if any, for the early release of holdback is
provided with the request.
b. The Regional Center Director determines that:
(1)
The contractor's general performance warrants partial release of the holdback without
conditions, or
(2)
A partial release of the holdback is appropriate with conditions, e.g., measures to assure
immediate distributions to subcontractors or others, would be in the mutual interest of
all participants, and
c. The undisbursed holdback amount must equal or exceed 5% of the contract amount.
5. Projects in difficulty. Release of part of the contractor's holdback before 90% contract completion may
be granted only to prevent a default of the construction loan and only if it would solve the project's
problems and enable it to reach construction completion.
a. The contractor's performance must be considered, including:
(1) The completed work must be satisfactory,
(2) The percentage of completed contract work must be sufficient to ensure project
completion within the specified contract time, and
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(3) The holdback may not be released if there are, unresolved questions concerning:
(a)
Quality of work,
(b)
Compliance with the contract, including outstanding change orders, or
(c)
Work is progressing behind the contractor's construction schedule, as amended by
approved change orders.
b. Written consent for the early release of holdback must be obtained from the surety, if any, the
mortgagor and the mortgagee.
F. Cash-Out Escrow From Land Equity or (any balance remaining after capitalizing the escrow.) See
Section 8.14.K.
1. Cash out from the excess value of the land, or the “as is” property value for a substantial
rehabilitation project, that was contributed to meet the sponsor’s equity requirement at initial
endorsement, above what was required at initial endorsement must be deferred and held by the
lender. If any of the land equity was used to fund escrows at initial endorsement, the remaining
balance is deferred and held by the lender. The lender will have discretion as to the form of escrow
to use to hold back any cash-out from land equity. Refer to Appendix 12A paragraph E about
eligible uses of equity before the escrow is held by the lender.
2. The lender will hold the cash out funds until project operations have demonstrated to the HUD
field office’s satisfaction that it has achieved 6 consecutive months of break-even occupancy or 12
months break-even occupancy for transactions that meet the Large Loan parameters. (Break-even
occupancy is defined as 1.0 debt service coverage, based on all sources of project income
including ancillary income.) HUD Production Underwriter will consult with AM staff prior to
approval of a release to obtain AM’s approve of the release. Multifamily Regional Center/Satellite
should exercise caution to be certain that monthly results are not erratic or seasonal and that 1.0 or
better debt service coverage will be sustainable after release of the escrow funds. HUD will
approve a request for release of funds on Form HUD-92464M from the lender. The lender’s file
should contain the HUD approval and documentation supporting the release.
12.16
Insurance Upon Completion
A. Basic requirements during construction stage are generally the same as for projects with insured
advances. However, because HUD does not insure advances for the construction loan, HUD does not
monitor the lender’s disbursements. Additionally, because HUD has no risk exposure until final
endorsement, HUD does not become involved in the workout of construction problems. The following
are major variations from standard program requirements for insurance upon completion projects.
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B. Firm Commitment to Insure upon Completion, Forms FHA-2453, FHA-2453-MM (for Section
223(f)), must be valid and outstanding until Final Endorsement of the permanent mortgage.
1. No initial closing. The construction stage starts after the issuance of the Firm Commitment.
2. Construction/rehabilitation must start and be completed within the period provided by the Firm
Commitment.
3. Extensions. See Chapter 11 for the extension of:
a. Construction period;
b. Firm Commitment expiration date, where required to permit project completion and Final
Endorsement.
C. Required documents include:
1. Construction contract, Form HUD-92442M. The following must be made a part of the contract:
a. General Conditions, AIA Document A201;
b. Supplementary General Conditions, Form HUD-92554M;
c. Davis-Bacon Wage Rates (supplied by HUD Labor Standards and Enforcement);
d. HUD Amendment to the B108, Owner-Architect Agreement to Identify Identities of Interest
between Owner/Contractor/Subcontractor/Architect;
e. Cost certification criteria from Form HUD-92442M, Article 13, where an identity of interest
exists or a “cost plus” form of contract is used.
2. A complete master set of drawings and specifications and two duplicate sets;
3. The Agreement and Certification, Form HUD-93305M, executed by the mortgagor, lender, and
HUD.
4. A title policy or title evidence showing:
a. Insured property free of all encumbrances other than the mortgage and acceptable reservations
of title;
b. Proof that no unpaid obligations exist except as previously approved by HUD;
c. Title policy continued to date of credit instrument endorsement.
5. Survey and Surveyor’s Certificate, Form HUD-91073-M;
6. Contractor’s Requisition Project Mortgages, Form HUD-92448. The Contractor’s Prevailing Wage
Certificate must be submitted at the time the mortgage is presented to HUD for insurance.
7. Assurance of funds to meet operating deficit. Completed Forms to assure funds are available to
carry the project to a sustaining occupancy after final closing:
a. HUD-92476M, Agreement of Sponsor to Furnish Additional Funds,
b. HUD-92476a-M, Escrow Agreement for Operating Deficit, and
c. HUD-92477M, Bond Guaranteeing Sponsor’s Performance.
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8. Assurance of completion: Not applicable to insurance upon completion projects.
9. Warranty against latent defects is required in accordance with Section 12.16.S.
D. The pre-construction conference must precede the initial start of construction, see Section 12.2.
E. Construction monitoring and reporting must be done in accordance with Section 12.3.
F. Labor and FHEO liaison, see Section 12.12.
G. Contractor’s monthly requisitions are not applicable to projects insured upon completion.
H. Offsite construction:
1. Monitoring is recorded by the HUD inspector on Form HUD-95379.
2. Advance of funds monitoring is not applicable to projects insured upon completion.
I. Construction contract changes and Architect’s supplemental instructions (see Sections 12.8 to 12.11
and 12.4.D). Construction changes are processed in the same manner as insurance of advances, except
as modified below:
1. An escrow is not required for additive change orders, because HUD has no risk exposure until
final closing. The mortgagor must be able to provide the additional funds required and must not
have any outstanding obligation in connection with construction other than the insured mortgage at
the time the mortgage is presented for insurance.
2. Surety approval is not required for the approval of additive change orders regardless of the
percentage of contract increase.
J. Permission to Occupy applies as in Section 12.14.
K. Final HUD representative’s Trip Report falls under HUD procedures.
L. Guarantee period falls under HUD procedures.
M. Working capital deposit and operating deficit escrows are not usually required for Insurance upon
Completion projects. However, to mitigate any risk, projects that apply for Insurance upon
Completion must fully meet the operating deficit escrow and the working capital requirements
contained in Section 8.13, except for the extra 2% new construction contingency portion of the
working capital escrow which is not required. See Sections 12.15.C and 12.15.E for releasing
escrowed funds.
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N. Property insurance schedule and requirements. When onsite construction is 80% complete (before
Final Endorsement of the mortgage), the lender must prepare:
1. Property Insurance Schedule, Form HUD-92329, that:
a. Correctly shows the insurable value of the completed structures;
b. Reflects any changes in cost occurring after issuance of Firm Commitment.
2. Property Insurance Requirements, Form HUD-92447.
O. MIP is not charged until the project reaches final closing.
P. Cost certification (see Chapter 13).
Q. Closing must occur within the period provided in the commitment.
R. Extension of Firm Commitment instructions are in Chapter 11.
S. Builder’s warranty. The general contractor must enter into a latent defect agreement with the Owner
and Lender for the benefit of HUD and provide one of the following at Final Endorsement to assure
correction of any latent defects:
1. Cash escrow deposit of 2.5% of the principal amount of the mortgage, to be retained in escrow by
the lender for a period of 15 months, or
2. An irrevocable, unconditional letter of credit issued to lender by a banking institution, or
3. Surety bond in the amount of 10% of the cost of construction or substantial rehabilitation. The
bond must be in effect for 2 years after substantial project completion. The bond must be on Form
HUD-3259, Surety Bond Against Defects Due to Defective Materials and/or Workmanship.
4. In cases when the latent defect escrow amount is small because total repair cost is minimal (e.g.,
$200,000 or less), the escrow is not required. The HUD Regional Center has the discretion to
waive the latent defect escrow.
12.17
Completion of Repairs Pursuant to Section 223(f)
A. Required Repairs are to be documented by the lender with a list that categorizes repairs as critical
repairs or non-critical repairs. (See Section 5.10.L. and Appendix 5G).
1. Critical repairs are any individual or combination of repairs required to correct conditions that:
a. Endanger the safety or well-being of residents, visitors or passers-by;
b. Endanger the physical security of the property;
c. Adversely affect project or unit(s) ingress or egress; or
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d. Prevent the project from reaching sustaining occupancy.
2. Non-critical repairs consist of all repairs other than critical repairs.
3. Completion of repairs.
a. Before closing: Critical repairs must be completed before Initial closing. A site visit(s) and
report(s) by a HUD representative are required to confirm satisfactory completion of required repairs
before closing unless HUD waives or delegates the responsibility.
b. After closing: At the request of the mortgagor, only non-critical repairs may be completed after
closing. HUD will require the following schedules:
(1) Schedule of Values for payment of completed repairs;
(2) Progress Schedule. All repairs must be completed within 12 months of loan closing;
(3) Schedule of Delayed or Interrupted Occupancy or Income, must list:
(a)
All facilities for which occupancy or income will be delayed or interrupted by
repairs delayed until after closing;
(b)
Period of delayed or interrupted occupancy or income;
(c)
Projected completion date.
(4) Release of Cash-Out/ Equity from Loan Proceeds.
Projects with a 50% cash-out holdback escrow set up at Initial/ Final Endorsement on Form
HUD-92476.1M, Escrow Agreement for Non-Critical, Deferred Repairs, are released at the
request of the Lender when the non-critical repairs are complete within 12 months of the
Initial/Final Endorsement. The owner may request through the Lender a release of escrow
funds during the progress of completion of the repairs, subject to evidence that the property
title is free and clear of mechanics liens, and that latent defects assurance is in place and has
been submitted to HUD. The owner must have demonstrated the ability to complete repairs in
a timely manner (repair progress schedule), and a commitment to keeping the property in good
repair with no deferred maintenance.
4. Payment for Repairs.
a. Critical Repairs completed before closing: Mortgage proceeds may be advanced at
Initial/Final Endorsement upon verification that repairs have been completed.
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b. Non-Critical Repairs completed after closing established by a repair escrow:
(1)
A completion repair escrow account must be established and held by lender in an amount
equal to 110% or 120% of the estimated repair costs (see Section 5.10.L) depending upon
program guidance.
(2)
The Schedule of Values for completed repairs will be provided to the HUD inspector,
who will recommend progress payments from this Schedule as a part of the Trip Report,
Form HUD-95379.
B. Unless HUD waives or delegates this inspection responsibility to others, an inspection of completed
repairs is performed by the HUD Inspector. It is anticipated that projects insured under Section 223(f)
with Level 1 Alterations (as defined in Chapter 5 of the MAP Guide) will not require inspections. Those
projects with Level 2 Alterations may require inspections based upon the type and complexity of
improvements, as may be determined by the CM. Those projects with Level 3 Alterations will require
inspections at repair completion stages of 35%, 65% and 100%. Inspections may be attended by the
owner, the architect, builder, consultants, and any other necessary parties. The inspection showing that all
repairs covered by the repair escrow are completed shall be considered the final inspection.
1. Inspection Reports are filed on Form HUD-95379, HUD Representative’s Trip Report, for each
monitoring visit. The following are included in the Trip Report:
a. Non-compliance with provisions of the commitment or closing, e.g. work write-up, drawings,
specifications, etc., including changes made to the work without prior approval;
b. Adverse conditions e.g. slow work completion, destruction of work, new municipal
requirements, disputes, etc.
c. Availability for use of facilities listed on the schedule of delayed or interrupted occupancy.
d. Municipal authorizations. Permissions to occupy use permits, etc. Where applicable, these
must be issued before closing, unless related to work delayed until after closing;
e. Items to be completed within twelve months from initial/final endorsement. The HUD
inspector must include:
(1) A detailed list of any exterior work;
(2) Recommended escrow amount; and
(3) Recommended completion date (not later than 12 months after closing);
2. Assignment documents. The MAP Lender and HUD should assemble the following documents to
monitor repairs and recommend payments:
a. Firm Commitment;
b. Escrow agreement (where closing has occurred);
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c. Survey, surveyor’s report and legal description;
d. List of required repairs (work write-up with clear and accurate scope cost and schedule of the
work items);
e. Drawings and specifications (where required);
f. Schedule of Values (required only for projects with repairs delayed after closing);
g. Progress schedule (required only for projects with repairs delayed after closing);
h. Schedule of delayed or interrupted occupancy or income (required only for projects with
repairs delayed after closing); and
i. Agreement and Certification.
C. Repair completion. All work must be acceptably completed before the loan closing, except for the
following:
1. Minor exterior work, which cannot be completed because of weather conditions, may be
completed after closing, on projects for which prior provisions were not made for completion of
non-critical work after closing; include the amount (s) to be escrowed.
2. Non-critical repairs may be completed after closing when provided in the commitment and when a
completion escrow is established at closing, except that:
a. All critical repairs must be completed before closing; and
b. An additional deposit must be made to an operating deficit account for delayed repairs which
will delay or interrupt occupancy or income for any period. The amount of the additional
deposit will be determined by HUD.
3. Repair monitoring. All work must be monitored and be acceptable to the lender and HUD whether
it is performed before or after closing.
D. Final report must be made upon completion of all work and is to be prepared by the HUD Inspector or
the Architect as may be determined by HUD. The final report must show that:
1. All work is acceptably completed in accordance with the firm commitment and/or closing escrow,
as applicable, and approved changes;
2. Offsite work is completed or that the municipality has given written assurance for its completion;
3. Utilities are connected;
4. Permanent ingress and egress facilities are provided, and
5. Applicable municipal inspections, approvals, etc., have been issued.
E. Changes in the repair work, including associated cost changes, must be submitted by letter or other
acceptable format i.e. sending a letter via electronic mail. Form HUD-92437 may be used as a general
guide, but the actual form must not be used.
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Chapter Title:
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12.17
Chapter Index / Section Index
Chapter 12
Construction Period
Completion of Repairs Pursuant to Section
223(f)
Document page 410
1.
Borrower and Lender must review and sign the modified list of required repairs describing all
changes before submitting to HUD for review;
2. Contractor and borrower’s Architect, if employed, must sign all changes.
F. Guarantee inspections. Where the owner uses a contractor, rather than its own staff, to carry out
repairs, guarantee inspections will be scheduled to discover and require correction of latent defects
within 1 year of the date of substantial completion of all repairs. See Sections 12.6.C and 12.16.C.
G. Projects in difficulty. Physical, financial, or management problems could be an indication that a
default is imminent. For further explanation see Management Agent Handbook 4381.5 REV-2 Chapter
6 Exhibit 6-1.
1. If the borrower has not completed all deferred repairs by the end of the repair period the HUD
Inspector will document all such non-completed repairs on Form HUD-95379, HUD
Representative’s Trip Report, and will submit the report to the lender with a copy to the HUD
Construction Manager.
2. The lender will complete the repairs using the repair escrow funds. The lender will submit a work
schedule to HUD for the completion of all remaining repairs, and will provide the borrower with a
breakdown of these repairs and the cost(s) of completion (including administrative expenses).
3. Funds remaining in the repair escrow account after completion of the repair work by lender will be
returned to the borrower, less reasonable administrative costs incurred by lender in completing the
repairs.
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13.1
Chapter 13
Cost Certification
Projects that Must Certify
Document page 411
Chapter Index / Section Index
Chapter 13
Cost Certification
13.1
Projects that Must Certify
Cost certification is required for all insured multifamily projects, except when the mortgage is 80 percent
or less of value and at least one of the following two criteria applies: the transaction involves tax credits,
or the project is refinancing under Section 207/223(f).
13.2
Purpose of Certification
The purpose of certification is to establish the borrower's actual costs, including contractor's cost, and
establish the "maximum insurable mortgage" for Final Endorsement of the insured mortgage.
13.3
Certifiable Costs
Certifiable costs are those costs that have been paid in cash or will be paid in cash within 45 days of final
closing, except for:
A. Land Value which HUD will calculate,
B. General Overhead which is certifiable whether or not it is paid in cash,
C. BSPRA, which is cost certifiable whether or not it is paid in cash, where there is an identity of interest
between the borrower and contractor, and
D. Non-profit Developer's Fee, which is cost certifiable whether or not it is paid in cash, less amounts
certified to and allowed on other line items.
13.4
Projects with LIHTCs are Exempt from Cost Certification
Requirements
The Housing Economic Recovery Act (HERA) of 2008 affected the borrower’s obligation to certify
“actual cost” (as defined in the National Housing Act) under the insured mortgage programs. If it is
determined at the time of issuance of the Firm Commitment for insurance that the ratio of loan proceeds to
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Chapter Index / Section Index
Chapter 13
Cost Certification
Projects with LIHTCs are Exempt from Cost
Certification Requirements
Document page 412
the actual cost of the project is less than or equal to 80 percent, the borrower is not required to certify
actual cost to HUD. The exemption affects construction, rehabilitation (including property acquisition),
purchase or refinance of a multifamily housing project for which equity is provided through tax credits,
i.e. LIHTC, Historic Tax Credits or New Market Tax Credits. Since the actual cost is not known at the
time of the issuance of the Firm Commitment use, in lieu of actual cost to determine the exemption from
cost certification, the Total Estimated Replacement Cost of the project (see Section G, line 74 on the Form
HUD-92264). An example of this computation is below.
Note that the borrower and the general contractor have the option to cost certify according to the guidance
in Sections 13.6 through 13.19.
A. This example illustrates the applicability of the cost certification exemption for a new construction and
substantial rehabilitation project using the lowest controlling mortgage criterion.
Total Project Replacement Cost (Section G line 74 Form HUD-92264) ….. $ 13,000,000
Tax Credit Equity for Mortgageable Items (Form HUD-92264-A) ...….……$ 5,000,000
Maximum Insurable Mortgage Amount (Form HUD-92264-A) …….……..$ 8,000,000
$ 8,000,000 / $13,000,000 = 62%
B. Audit Fee
In cases that are exempt from cost certification, a Cost Certification Audit Fee, Section G line 66, on
Form HUD-92264 is not applicable. The borrower and the general contractor may certify to their
actual costs. Should they decide to cost certify per HUD’s methodology, the audit cost is
mortgageable.
C. Substantial Completion Date
1. The substantial completion date is the date the Architect dates and signs the certification on Form
HUD-92485, Permission to Occupy Project Mortgages (PTO). Upon execution, the Architect
certifies that the construction work is sufficiently complete in accordance with the construction
contract documents such that the project may be occupied for the intended use except for
acceptable items of delayed construction completion. The HUD inspector will complete the
portion, “FHA Inspection Report” on the Form to verify that construction is substantially complete
and the project is suitable for occupancy. The Form is subsequently signed by HUD’s Authorized
Agent granting approval of the PTO. Upon execution of the PTO the HUD inspector must
prepare, date and sign the final Form HUD-95379, HUD Representative‘s Trip Report
documenting the project has reached 100% substantial completion. The Regional Center or
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13.4
Chapter 13
Cost Certification
Projects with LIHTCs are Exempt from Cost
Certification Requirements
Document page 413
Chapter Index / Section Index
Satellite Office will notify the borrower, general contractor, and lender, in writing of the
substantial completion date so that preparation for final closing can begin.
To account for multiple buildings constructed under one insured mortgage the Architect will
approve a series of Permissions to Occupy as buildings are complete and units become available.
When all buildings are complete the Architect will write on the front of the HUD-92485 indicating
it is the final PTO.
2.
The final trip report will mark when project operations begin. In the absence of a cost
certification cut-off date, the Production staff will enter “The Date of Visit” from the final HUD95379 as the cost cut-off date in the HUD data system (i.e. DAP (Development Application
Process)) and advise the borrower of the date. The day after that date becomes the “Financial
Assessment Subsystem (FASS) date” to start project operations and begin annual financial
statement (AFS) reporting.
D. Treatment of Operating Income Generated During Construction
1. The borrower must account for all operating income generated during construction and ending three
months before the originally scheduled date of the first principal payment under the mortgage. In
cases such as new construction with partial occupancy approval as described in Section 12.14.D or
a substantial rehabilitation tax credit project, without significant resident displacement, there may
be considerable net operating income (NOI) (or interim income) generated during the construction
period. This interim income may be used to pay for mortgageable and non-mortgageable items.
Therefore, the borrower must prepare an Operating (or Income and Expense) Statement covering
the period from first occupancy (if occupancy occurred during construction see Section 12.14.D)
or from the date of substantial completion through the period ending three months before the date
of the first principal payment of the originally scheduled mortgage. The borrower may include in
the operating statement all soft costs incurred up to 60 days beyond this date, which will establish
the cut-off date. The day after the cut-off date becomes the FASS and operations reporting date.
The Lender must submit the borrower’s operating statement to HUD at least 30 days before the
final endorsement scheduled date. If the operating statement evidences receipt of NOI during this
period, the borrower can apply the interim income according to the following:
a. If the replacement cost mortgage (Criterion 3) is not the controlling mortgage, any NOI
generated during construction may be applied to cover shortfalls in mortgageable soft costs,
change orders, initial operating deficit and escrows. At final endorsement the balance of funds
may be distributed to the borrower or deposited to the project’s Reserve for Replacement
account or applied toward the amortization of the mortgage principal.
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13.4
Chapter 13
Cost Certification
Projects with LIHTCs are Exempt from Cost
Certification Requirements
Document page 414
Chapter Index / Section Index
b. If the replacement cost mortgage (Criterion 3) is controlling the Mortgage Credit staff will do a
calculation and determine if the interim NOI is equal to or greater than 1% of the original
mortgage, and if it is, calculated interim NOI is deducted from the certified replacement cost
amount. When the NOI does not meet this 1% threshold, apply the amount toward shortfalls,
etc. as instructed in number 1 above. The Lender must deposit any remaining balance into the
project’s Reserve for Replacement account or applied toward the amortization of the mortgage
principal at final endorsement. There is no distribution to the borrower.
c. See Section 13.19.C below on the distribution prohibition for a borrower’s affiliate or
principal.
2. In those cases whereby interim income is not generated or the borrower opts not to set a cost cutoff date, it is not necessary for a borrower to submit an operating statement. The Regional Center
or Satellite Office will notify the lender, borrower, and general contractor, in writing, of the 100%
final completion date from the final Form HUD-95379, HUD Representative‘s Trip Report. The
Production staff will entered “The Date of Visit” from the final HUD-95379 as the cost cut-off
date, into the HUD data system. The day after this date will be considered the start of project
operations and FASS reporting.
E. Copy of Final Sources and Uses Statement. The lender may submit a copy of the final Sources and
Uses Statement prepared by the state tax credit allocating agency to assist in the lender and HUD
review of the final amounts of sources, income and uses.
F. Modification to Form HUD-92580 – Determination of Maximum Insurable Mortgage
For those projects that are exempt from providing a cost certification, after substantial completion, the
Regional Center or Satellite OFFICE will issue a modified Form HUD-92580, as illustrated below.
Strikeouts are illustrated on line items 2 and 10, below:
1. (a) Original Mortgage Amount ……………………………… $10,000,000.00
(b thru e) are not applicable - Insert N/A or cross through.
2. Certified Actual Cost – Strike certified actual cost and Insert
Replacement Cost From Section G Line 74 ……….……………...$13,000,000
3. Disallowed Cost ……………………(Insert N/A)……...……........$_N/A_____
4. Recognized Actual Cost of Improvements … (Sec. G Line 74) .....$13,000,000
5. Land ……………………………………………………….……....$_________
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Chapter Title:
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Cost Certification
Subsection Designation:
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Document page 415
Chapter Index / Section Index
6. TOTAL LAND AND IMPROVEMENTS …………………..……$13,000,000
7. Statutory Percentage of Total Cost (____ % of item 6) ……......$___N/A___
8. For Substantial Rehabilitation-Property Owned, enter the Lesser of:
(i) $____existing Mortgage Indebtedness on (Land and Improvements to be
Rehabilitated) or
(ii) An Amount Equal To ___% of the Fair Market Value $____ of Land and
Improvements
Before (Repair or Rehabilitation) ………….………………….$____N/A_____
9. TOTAL Line 7 plus line 8, (if any) ….………………………..$____N/A_____
10. Maximum Insurable Mortgage in Multiples of $100, (Item 1(a)) or
Item 6 whichever is the Lesser) ………………………………….$10,000,000
NOTE: The Mortgage Credit staff should note on this Form that the project is exempt from cost
certification due to the loan proceeds to actual cost being less than 80%. Insert the actual percentage
of the loan to cost ___________.
Completion of the reverse side of the Form as follows:
Schedule 1 N/A
Schedule 2 Disallowed Costs: N/A
Schedule 3 Computation of Borrower’s Initial Equity Investment
1. Total Land and Improvements (line 6 above)
$13,000,000
2. Less: Maximum Insurable Mortgage (line 10 above) $10,000,000
3. Borrower’s Initial Equity Investment
MAP Guide, January 2016
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$ 3,000,000
Bookmarked version, r 1.1, page 415 of 534
Chapter Title:
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13.5
Chapter Index / Section Index
13.5
Chapter 13
Cost Certification
Types of Cost Certification
Document page 416
Types of Cost Certification
A. Standard or "Long Form" Certification is required, except for projects permitted to use the
"simplified" cost certification and for certification of projects insured under Section 207.
B. Simplified Certification is restricted to projects involving 40 units or less of proposed construction or
substantial rehabilitation and is used for projects under Section 207/223(f).
C. Section 223(f) Certification is required for all projects insured under Section 207 except in cases for
Section 207/223(f) transactions where the insured mortgage is 80% or less of the value.
D. Section 223(f) Supplemental Certification is required for projects identified in paragraph C above,
when completion of repairs is permitted after closing. The Certification is submitted 15 business days
after repairs are confirmed complete.
13.6
Entities That Must Cost Certify
A. The borrower must certify under all programs, except where HUD has determined at the time of
issuance of the Firm Commitment that the insured mortgage under: a) Section 221(d)/220/231 new
construction/substantial rehabilitation is 80% or less of replacement cost and the project is will benefit
from LIHTC, Historic Tax Credits or New Market Tax Credits, or b) Section 207/223(f) refinance is
80% or less of value..
B. When the borrower is required to cost certify, the Contractor must also cost certify when:
1. The Contractor has an identity of interest with the mortgagor, whether such identity of interest
existed or developed before or after the initial closing (for insured advances projects) or issuance
of the Firm Commitment (for insurance upon completion projects); and/or
2. The Contractor used the Construction Contract-Cost Plus, Form HUD-92442M, whether or not any
identity of interest with the borrower existed or developed.
C. When the Borrower is required to cost certify the subcontractors at any tier, equipment lessors,
material suppliers and manufacturers of industrialized housing must cost certify where:
1. The total of all subcontracts, purchases, and leases are more than 0.5% of the mortgage, and
2. An identity of interest exists or comes into being between such subcontractor, equipment lessor,
material supplier, or manufacturer of industrialized housing and either:
a. The borrower; or
b. The contractor, where the contractor must cost certify.
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13.7
13.7
Chapter 13
Cost Certification
Cost Certification Sequence of Events
Document page 417
Chapter Index / Section Index
Cost Certification Sequence of Events
A. Notification of Pre-Cost Certification Conference. HUD must notify the lender, borrower, and
contractor when the project is 80% complete. HUD should notify new sponsors and general
contractors as early as 70% completion. The letter should state that:
1. The borrower, general contractor, their accountants, and the lender should attend the conference.
2. Enclose with the letter the (800) 767-7468 number or the internet address for:
a. Handbook
IG
2000.4
Consolidated
Audit
Guide
for
HUD
Programs:
http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/handbooks
/oigh/2000.4
b. Four
copies
of
each
of
the
applicable
forms:
(http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/forms/hu
d9#group2 ):
(1)
Form HUD-92330, Borrower's Certificate of Actual Cost.
(2)
Form HUD-92330A, Contractor's Certificate of Actual Cost, if applicable.
B. Conduct of conference is the responsibility of the assigned HUD staff and should be held before
the project is 90% complete. At the conference, HUD staff will explain:
1. Substantial completion, administrative completion, and cut off dates.
2. Documentation required for cost certification including the income statement and balance sheet.
3. Remind the borrower and accountant that they are responsible for computing the liquidated
damages/actual damages and incentive portions, if applicable, of the construction contract using
the certified amounts on Form HUD-92330.
4. Necessity for a careful review and completeness of the documentation including dates and
signatures, and timeliness of the submission, HUD review, and final endorsement.
5. Any problems with prevailing wage certifications or other labor issues.
C. Cut-off date established for computation of the cost certification. Submission and HUD approval of
the cost certification must occur before final closing, except that the Section 223(f) supplemental cost
certification is not required until completion of non-critical repairs deferred until after closing.
D. Upon completion of the project, Form HUD-92464M, Request for Approval of Advance of Escrow
Funds, should be prepared by the lender and submitted to HUD for approval.
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13.8
13.8
Chapter 13
Cost Certification
Substantial Completion Date, Cut-Off Date, and
Final Completion Date
Chapter Index / Section Index
Document page 418
Substantial Completion Date, Cut-Off Date, and Final Completion
Date
A. Completion dates.
1. The substantial completion date for determining actual costs is the date the Architect dates and
signs the certification on Form HUD-92485, Permission to Occupy Project Mortgages. The
Architect is certifying that part of or all of the construction work is sufficiently complete in
accordance with the construction contract documents and that the project may be occupied for the
intended use. The form is subsequently signed by HUD’s Authorized Agent. Construction must
be complete except for acceptable items of delayed completion and the Regional Center or
Satellite Office will notify the borrower, general contractor, and lender, in writing, of the
substantial completion date.
2. The substantial completion date is the effective date for cost certification. The borrower has the option
to include in the cost certification all soft costs incurred up to 60 days beyond this date. The date
selected by the borrower is the "cut-off date" for the soft costs.
3. The borrower's balance sheet and operating statement date must agree with the selected cut-off
date.
4. The final completion is the date the HUD Inspector signs the final HUD Representative's Trip
Report, Form HUD-95379, provided that the Construction Manager subsequently endorses the trip
report. Construction must be 100% complete.
5. For financial reporting purposes, the day after the cut-off date is the commencement of operations
and the projects’ first year of reporting annual audited financial statements. This first year will
cover the period from the day after the cut-off date to the projects’ fiscal year end. This is the date
Asset Management will start monitoring the project’s financial condition (monthly accounting
reports) once the certificates of occupancy (Form HUD-92485) are issued.
13.9
Administrative Completion Date
The Regional Center Director may advance the completion date to prevent unnecessary accumulation of
soft costs when projects which are nearly complete face unnecessary delay.
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Chapter 13
Cost Certification
13.10 Submission Date
Document page 419
A. The Regional Center Director may set an administrative completion date for any project when the
monthly inspection reports show 95% completion of work and thereafter less than 2% increase in
percentage of completion in any month.
B. The Regional Center Director will notify the borrower, general contractor, and lender in writing of the
administrative completion date and the following:
1. The administrative completion date is the effective date for cost certification except that all
soft costs up to 60 days beyond this date may be included at the option of the borrower.
2. The date of the balance sheet and operating statement must be the same as the cut-off date selected
by the borrower.
3. Liquidated/actual damages for cost certification purposes will be computed using the
administrative completion date. However, the general contractor is responsible for
liquidated/actual damages through the date of substantial completion.
C. Copies of the notification go to the HQ Docket, Office Docket and Closing Attorney's file.
13.10
Submission Date
The submission date for cost certification should be within 30 to 45 days after the cut-off date, and not
less than 30 days before the desired final closing date.
13.11
Required Forms
A. Form HUD-92330, Mortgagor's Certificate of Actual Cost; see line-by-line instructions contained in
the Forms Book or on the multifamily internet site:
http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4470.2/index.cfm .
B. Form HUD-92330A, Contractor's Certificate of Actual Cost; see instructions contained herein at
Sections 13.12, 13.16, and 13.17. The subcontractor, material supplier, industrialized housing
manufacturer, and the equipment lessor are required to use this form to certify cost.
NOTE: When a project includes rehabilitation and new construction, a separate form is required for
each, with a master form summarizing total project costs, including fees.
C. Form HUD-2205-A, Borrower's Certificate of Actual Cost (Section 207 Pursuant to Section 223(f)),
and line by line instructions are contained in the Forms Book or on the multifamily internet site
http://www.hud.gov/offices/adm/hudclips/index.cfm .
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13.12
13.12
Chapter 13
Cost Certification
Required Statements and Certifications
Document page 420
Chapter Index / Section Index
Required Statements and Certifications
For all projects, regardless of whether the project has a cost certification exemption, the required
statements and certifications are:
New construction - an unaudited balance sheet that covers the period from the date of initial endorsement
through cut-off and an unaudited income statement that covers the period from the date of initial
occupancy through the cut-off date. The format and content of the balance sheet must follow Section
13.12.B.4 & B.5, below.
Substantial rehabilitation – an unaudited balance sheet and an unaudited income statement that is dated
from the date of initial endorsement through the cut-off date. The format and content of the balance sheet
must follow Section 13.12.B.4 & B.5, below.
Follow either A or B, below, depending on qualifications in A.1.
A. Simplified Form of Cost Certification. Use Forms HUD-92330, HUD-92330A (if a cost plus
construction contract was used or an identity of interest exists between the borrower and the general
contractor). An accountant's opinion is not needed.
1. Simplified cost certification is permitted for new construction or substantial rehabilitation project’s
involving 40 units or less and for refinancing or purchase of existing properties under 207/223(f).
2. If there is an identity of interest between a subcontractor, material supplier, equipment lessor, or
manufacturer of industrialized housing and the borrower and/or general contractor must cost
certify, and the total of all identity of interest subcontracts, purchases and leases is more than 0.5%
of the mortgage, the identified party uses Form HUD-92330A. This requirement established by
the Agreement and Certification, Form HUD-93305M, applies in all cases.
3. An un-audited balance sheet of the borrower entity, as of the cut-off date is required in all cases.
Format and content of the balance sheet must follow Section 13.12.B.4, below.
4. An un-audited operating statement is required if occupancy occurred during construction. Format and
content of the operating statement must follow Section 13.12.B.5, below.
B. Long Form Cost Certification. For cases that do not qualify for simplified cost certification based
upon paragraph A.1, above, please submit the following:
1. Borrower's Certificate of Actual Cost, Form HUD-92330, supported by an accountant's opinion
(refer to Section 13.12.B.6).
2. Contractor's Certificate of Actual Cost, Form HUD-92330A, supported by an accountant's opinion
(refer to Section 13.12.B.6), is required if there is an identity of interest with the borrower or if a
cost plus construction contract was used.
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Chapter 13
Cost Certification
Required Statements and Certifications
Document page 421
Chapter Index / Section Index
3. Subcontractors, suppliers, and equipment lessor with an identity of interest with either the
borrower or general contractor must submit Form HUD-92330A supported by an accountant's
opinion.
a. Material suppliers. Attach to Form HUD-92330A a sheet showing:
(1) Quantities furnished.
(2) Sources from which the materials were obtained.
(3) Unit prices paid to the sources, brand names, model numbers, sizes, lumber grades, etc., as
applicable.
NOTE: No amount will be included for general requirements (e.g.: job overhead).
b. Equipment Lessor. Attach to Form HUD-92330A a sheet showing:
(1) Dates the equipment was acquired,
(2) Age of equipment at acquisition date,
(3) Brand names and model numbers,
(4) Sizes,
(5) Dates and length of time used, and
(6) Rates charged.
(a) The Lessor(s) must certify that:
(i) The rates charged were not more than the local going rate obtainable in the area,
including any maintenance and repair.
(ii) The time charged was not more than essential for the project.
(iii)The charges did not exceed the purchase price of the equipment.
(b) Lump Sum Basis. Instead of providing an attachment containing the above
information, the lessor(s) may elect to certify to charges at 85% of the local going rates
for identical equipment under arms' length (lump sum) leases. When using this
alternative, the lessor agrees:
(i) The Regional Center is the sole judge of the reasonableness of the time and rates
charged, and
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Chapter 13
Cost Certification
Required Statements and Certifications
Document page 422
(ii) Equipment maintenance and repair expense is the responsibility of the lessor(s) and
is not included as an additional cost.
(c) Subcontractor's equipment. Costs for subcontractor(s) equipment, whether owned or
rented, are considered in the markup for overhead and profit. These costs shall be reflected
in the total subcontract and in the prior approval of identity of interest entities. A separate
certification of the equipment is not required.
(d) Manufacturer of Industrialized Housing. Attach to Form HUD-92330A, a breakdown
of Division 13, Special Construction showing:
(i)
Manufacturing costs.
(a) Labor
(b)
Materials
(c)
Sales and any other taxes
(d)
Factory overhead
(e)
General overhead and profit
NOTE: The manufacturer's accounting system must follow generally accepted
accounting procedures, which will allow certification of the actual cost of
manufacturing by a Certified Public Accountant or Independent Public Accountant.
No amount will be included for transportation or work at the project site.
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(ii)
13.12
Chapter 13
Cost Certification
Required Statements and Certifications
Document page 423
Chapter Index / Section Index
Transportation costs, factory to project site (if provided by manufacturer).
(a)
Labor
(b)
Equipment
(iii) On-site erection costs (if provided by manufacturer).
(a)
Labor
(b)
Equipment
(c)
Materials
(d)
General requirements (job overhead)
(iv) The remainder of the manufacturer's Form HUD-92330A is completed per
outstanding instructions.
NOTE: There can be no duplication of manufacturing costs, e.g., repair of
components damaged in shipment.
4. An audited balance sheet of the borrower entity, as of the cut-off date is required.
a. The balance sheet must contain the following certification:
I HEREBY CERTIFY that the foregoing figures and statements contained herein submitted by
me as agent of the borrower [owner] for the purpose of obtaining mortgage insurance under the
National Housing Act are true and give a correct showing of (Name of borrower or owner)
financial position as of (date of financial statement).
Signed this
day of
, 20XX
agent with name printed or typed under signature)
(Signature of authorized
WARNING: HUD will prosecute false claims and statements. Conviction may result in
criminal and/or civil penalties. (18U.S.C. 1001, 1010. 1012; 31U.S.C. 3729, 3802)
b. Furnish reconciling information if short-term liabilities on the balance sheet do not agree with
Column B of Form HUD-92330.
c. Explain the purpose of all liabilities in the notes to the financial statement and include
repayment requirements of the liabilities. Take special care to note any liabilities included for
repayment on the balance sheet that were not disclosed during the firm processing stage or
before initial endorsement. If such liabilities are found, inform the borrower that the liabilities
cannot be an obligation of the project; repayment is the responsibility of the borrower. These
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Required Statements and Certifications
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liabilities will not be considered (allowed nor disallowed) in the review of the cost
certification. When non-disclosures are found it requires a detailed review of cost certification
Forms HUD-92330 and HUD-92330A.
d. If proceeds and obligations from project syndication are passed through the books and records
of the borrower entity, reflect receivables as an asset of the borrower entity.
e. The notes to the balance sheet must identify the original amount of and summarize the
expenditures from the working capital deposit.
5. An audited operating statement is required if occupancy occurs before the cost certification cut-off
date.
a. The statement must contain the certification contained in Section 13.12.B.4.
b. Prepare the operating statement on an accrual basis.
c. The statement covers the beginning of marketing and rent-up activities (or date of initial
endorsement in rehabilitation projects where occupancy is continuous) to the cut-off date.
d. Marketing and rent-up activities will start no later than 6 months before the issuance of the first
Permission to Occupy-Project Mortgages, Form HUD-92485.
e. The statement must show the actual dates covered rather than language such as "From the Date
of Commencement of Marketing and Rent-up Activities, etc."
f. The statement must show income from all sources. Do not consider security deposits as income.
g. The operating statement should not contain any expense items that were paid or should have been
paid from the working capital deposit or otherwise included in cost certification.
h. Operating expenses may include:
(1) Expenses directly relating to renting the project, such as:
(a) Rental commissions customary for the type of project, if any, and
(b) Marketing and advertising expenses.
(2) Purchase of furnishings, fixtures, equipment and supplies not paid from the working capital
deposit and in the eligible replacement costs.
(3) Reasonable fees for preparing any Federal, State, or local tax return information required of
the project.
For example: If the borrower entity is a partnership, the cost of preparing both Form 1065,
U.S. Partnership Return of Income, and related K Schedules may be considered. Do not
recognize the cost of preparing a partner's personal Form 1040 return.
(4) Electricity, gas, water, and operating salaries (maintenance, cleaners, gardeners, elevator
operators, etc.) to the extent they are not included in construction cost of Form HUDMAP Guide, January 2016
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92330, Borrower's Certificate of Actual Cost, or HUD-92330A, Contractor's Certificate of
Actual Cost.
(5) Management fee stated in the contract.
(6) Services not covered by the management fee under Chapter 3 of Handbook 4381.5,
Compensations for Management Services in Multifamily Housing Projects with Insured or
HUD-Held Mortgages.
i. Operating expenses may not include:
(1) Depreciation
(2) Interest, taxes, property insurance premiums, and mortgage insurance premiums that are
reflected in Form HUD-92330, Borrower's Certificate of Actual Cost.
(3) Salaries paid to principals of the sponsor or borrower for managing the borrower entity.
j. Treatment of net operating income generated during construction:
(1) If the replacement cost mortgage (Criterion 3) is not the controlling mortgage, any NOI
generated during construction may be applied to cover shortfalls in mortgageable soft
costs, change orders, initial operating deficit and escrows. At final endorsement the
balance of funds may be distributed to the borrower or deposited to the project’s Reserve
for Replacement account or applied toward the amortization of the mortgage principal.
(2) If the replacement cost mortgage (Criterion 3) is controlling the Mortgage Credit staff will
do a calculation and determine if the interim NOI is equal to or greater than 1% of the
original mortgage, and if it is, calculated interim NOI is deducted from the certified
replacement cost amount. When the NOI does not meet this 1% threshold, apply the
amount toward shortfalls, etc. as instructed in number 1 above. The Lender must deposit
any remaining balance into the project’s Reserve for Replacement account or apply it
toward the amortization of the mortgage principal at final endorsement. There is no
distribution to the borrower.
(3) For a non-profit mortgagor process:
(a) As a recovery of construction costs at cost certification, to the extent that it was used to
reduce liquidated/actual damages.
(b) As an offset for a mortgage increase.
(c) Deposit the unused portion of net income into the project’s Reserve for Replacement
account at final endorsement.
k. If operating expenses exceed income:
(1) No entry is made on Form HUD-92330, Mortgagor's Certification of Actual Cost.
(2) Operating deficit may be carried over as a reduction to net income on the supplemental
operating statement.
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Chapter 13
Cost Certification
Required Statements and Certifications
Document page 426
6. A Certification by an independent Certified Public Accountant or an Independent Public
Accountant must accompany Form HUD-92330, Mortgagor's Certificate of Actual Cost, including
the audited balance sheet and operating statement of the borrower, and Form HUD-92330A,
Contractor's Certificate of Actual Cost.
a. The accountant must meet the auditor qualifications of the Government Auditing Standards
(GAO Yellow Book), including the qualifications relating to independence and continuing
professional education. The audit organization also must meet the quality control standards of
the GAO Yellow Book.
b. Part 24 of Title 24 of the Code of Federal Regulations prohibits accountants from contracting
for services when their name is shown on the HUD and General Services Administration
Government-wide Consolidated List of Debarred, Suspended and Ineligible Contractors and
Grantees.
c. The accountant must also comply with the requirements in Chapters 1, 2, and 6 of HUD
Handbook IG 2000.4, "Consolidated Audit Guide for Audits of HUD Programs."
7. The borrower must submit a supplemental operating income statement if more than 3 months exist
between the cut-off date and the start of amortization. If a deferment of amortization was granted,
(Section 13.27) use the new date for the start of amortization in determining the need for a
supplemental operating statement.
a. This requirement does not apply to non-profit borrowers or any project where the mortgage is
$200,000 or less.
b. The statement covers the period from the cost certification cut-off date to the date, which is 3
months before the start of amortization. The borrower should submit the statement within 30
days after the expiration of this period.
c. If the required original cost certification was audited, a CPA or IPA must prepare and certify
the supplemental statement.
d. The borrower may advance the date of amortization to avoid submitting a supplemental
income statement.
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e. In preparing the statement, if the operating statement submitted at cost certification shows
expenses in excess of income, such expenses may be carried forward as "un-recovered
expense–prior period."
C. Section 223(f) Projects. The borrower must certify to the total costs incurred in the acquisition or
refinancing of the property using Form HUD-2205-A, Mortgagor's Certificate of Actual Cost. The
certification must be dated and signed by an authorized agent of the borrower. An accountant's
opinion is not needed.
1. The certification must be submitted after all critical repairs have been completed, but at least 15
days before the desired closing date.
2. The general contractor will be required to cost certify using Form HUD-92330A if a cost plus
construction contract is used.
3. A balance sheet and income statement are not required.
4. For cases involving deferred repairs, the borrower must submit a supplemental cost certification
(Form HUD-2205-A) detailing the actual cost of the deferred repairs.
5. No cost certification is required for a 207/223(f) refinancing transaction where the mortgage is
equal to or less than 80% of value.
13.13
Deficiencies in Cost Certification Submission
When the cost certification package is received for processing:
A. The Cost and Mortgage Credit reviewers will:
1. Determine deficiencies associated with the borrower’s and contractor’s cost certifications.
2. Advise the Regional Center Director and estimate the time needed to resolve the problem(s).
3. Attempt to resolve all problems by telephone before making a formal written request. This usually
allows processing to continue while waiting for a formal reply.
4. Send a letter within 5 workdays to the borrower with copies to the general contractor (if
applicable), their accountants, and the lender stating the deficiencies and requesting information.
B. Upon receipt of all necessary information, combined processing should not exceed 15 workdays.
C. If the borrower or contractor indicates clarification will be forwarded within 5 work days, the
conclusions of cost certification can await the additional information.
D. If not, issue Form HUD-92580.
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13.14 Mortgage Credit Limited Review
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Mortgage Credit Limited Review
A. In cases where the borrower has not requested a mortgage increase, the HUD staff will:
1. Review Form HUD-92330, Borrower’s Certificate of Actual Cost. Adjust for items paid out of
working capital and costs reflected on income statement.
2. Review the reporting of:
a. Net income earned before the start of amortization. Report all income earned from the
beginning of marketing and rent-up activities to the cut-off date for new construction projects
and unoccupied substantial rehabilitation projects. For substantial rehabilitation projects where
occupancy is continuous, report all income from the date of initial endorsement or, for
insurance upon completion cases, the start of construction to the cut-off date. Make
adjustments for ineligible reported expenses, such as depreciation.
b. The reporting of all grants/loans received for replacement cost items.
3. Complete Form HUD-92580, Maximum Insurable Mortgage, using the figures from Column C,
Total, of Form HUD-92330. Complete the forms based on the most current instructions, except for
the following changes:
a. Line 2. Reflect the amount indicated in Column C of Form HUD-92330.
b. Line 3. Explain any adjustments made to the net income or grant/loan amounts reported on
Form HUD-92330.
NOTE: If adjustments are made to items other than net income and grants/loans, Form HUD92331A should be completed.
4. When the borrower and the contractor submit their individual certificates of actual costs for review
they should have already agreed to the amount due the contractor. The amount due the contractor
is reported on the certificates of actual costs and there should be no disagreement because all “to
be paid items” will be listed on the HUD-92580 schedule 1, item by item. The Form HUD-92023,
Request for Final Endorsement of Credit Instrument, must match the Maximum Insurable
Mortgage, HUD-92580 minus whatever was paid in the interim. As mortgage credit performs the
cost certification and prepares the HUD-92580, consider the follow when reconciling the certified
costs:
a. After completion of the 92580 the Regional Center or Satellite Office notifies the
lender/owner/GC of the balance in the line item for the GC, if there are issues then the
Field will not move forward with the cost certification until all pending “to be paid items”
are resolved.
b. The GC’s cost certification has to balance with the items remaining to be paid.
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c. Mortgage Credit has to reconcile these numbers at cost certification, if there is a dispute all
releases freeze until HUD/lender/GC come to agreement on who is owed what.
5. Report anything suspicious in the submission, (e.g. liabilities not disclosed during firm processing
or before initial endorsement) to the Regional Center Director, who has the authority to request
that a full cost certification review be completed. For such cases, complete Forms HUD-92331-A,
and HUD-92580 based on the instructions in the Forms Book or on the multifamily internet site
http://www.hud.gov/offices/adm/hudclips/index.cfm, and Section 13.16, below. Also, if an
accountant’s work is consistently deficient, warn the accountant that borrowers using their services
will be advised that HUD will perform a detailed cost certification review.
13.15
Mortgage Credit Detailed Review
When a mortgage increase is requested of the Regional Center Director, a more detailed review is
required. The HUD Mortgage Credit staff will:
A. Carefully review Forms HUD-92330 and HUD-92330-A if required for mathematical accuracy and
compliance with prescribed procedures.
B. Ensure that the submission contains required schedules and bills, which have not been submitted with
previous draw requests, to support the certified amounts for interest, taxes, property insurance, MIP,
title and recording, financing fees, legal, organizational and audit fees, offsite costs and other fees.
C. Require clarification or breakdown of all, or any part of, the cost figures presented by the borrower or
general contractor, if applicable.
D. Scrutinize any existence of an identity of interest subcontractor, material supplier or equipment lessor
relationship.
E. Review the notes and schedules attached to the accountant’s opinion. Pay special attention to any
liabilities included for repayment on the balance sheet that were not disclosed during the firm
processing stage or before initial endorsement. These liabilities are not eligible for inclusion in the
cost certification.
F. Recommend that the Regional Center Director request an audit of the borrower’s and/or contractor’s
books by the Regional Inspector General for Audit before issuing Form HUD-92580, Maximum
Insurable Mortgage, when differences of opinion arise from other than:
1. Honest differences of opinion clearly identifiable as such.
2. Other justifiable causes.
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Chapter 13
Cost Certification
Allowable Costs in Borrower’s Certificate of
Actual Cost
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G. If considerable time has passed between initial occupancy and the cut-off date, some items properly
allocable to renting and operating the project may be charged against construction cost.
1. It may not be possible or practical to make precise allocation of such items as gas and electricity,
clean-up costs, etc., between construction and operation periods.
2. Insist on reasonable allocations and eliminate duplicate claims for the expenses under both
categories.
H. Advise cost staff of any construction costs included in “Miscellaneous” and “Other” categories of
Form HUD-92330.
I. Check items and amounts in the borrower’s cost certification without auditing the borrower’s books
and records. An audit may be needed later. (Refer to Section 13.29)
J. Record the results of the review (including NOI) on Form HUD-92331A, Cost Certification Review
Worksheet.
13.16
Allowable Costs in Borrower’s Certificate of Actual Cost
A. Construction Contract:
1. A lump sum construction contract is permitted when no identity of interest exists between the
borrower and general contractor. The amount allowed in cost certification is the lesser of:
a. Actual cash paid or to be paid by the borrower under the construction contract.
b. Contract price as adjusted by HUD’s estimated cumulative effect of approved change orders
paid, or to be paid, by the borrower and the liquidated/actual damages provision to the contract,
if applicable.
2. A cost-plus construction contract is required when an identity of interest exists between the
borrower and general contractor.
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3. The amount allowed in cost certification when a cost-plus contract is used is the lesser of:
a. Actual cash paid, or to be paid, by the borrower under the construction contract, or
b. Amount the cost analyst allowed for construction on Form HUD-92331, Summary of Cost
Certification Review–Cost Section, or
c. Contract price as adjusted by the HUD estimated cumulative effect of approved change orders
paid, or to be paid, by the borrower and, if applicable, either the incentive provision or the
liquidated/actual damages provision of the contract.
NOTE:
(1) Recognize approved change orders necessitated by errors or omissions by the architect
only to the extent there are savings in the mortgage. Do not recognize these change
orders when processing a mortgage increase.
(2) Do not recognize approved betterment change orders in calculating the adjusted upset
price in paragraphs A.1.b and A.3.c, above, unless they are determined by the cost staff
to be necessary changes as defined in Section 12.8.
(3) Recognize the increase in general requirements, if any, noted on approved time
extension change orders. Do not recognize increases in soft costs associated with the
change order. The soft costs will be recognized under the applicable line items.
(4) When BSPRA is not applicable, for profit motivated projects involving an identity of
interest between the borrower and general contractor, the amount of builder’s profit as
shown on Form HUD-93305M is eligible whether or not it was paid in cash.
(5) For non-profit borrowers, the allowable builder’s profit is the lesser of the amount
actually paid or to be paid in cash to the general contractor or the amount of builder’s
profit shown in Section G of Form HUD-92264, plus or minus any amount applicable
due to HUD-approved change orders.
4. An identity of interest is construed to exist when:
a. There is any financial interest of the borrower in the general contractor or any financial interest
of the general contractor in the borrower.
b. Any officer, director, or stockholder or partner of the borrower is also an officer, director or
stockholder or partner of the general contractor.
c. Any officer, director, stockholder, or partner of the borrower has any financial interest in the
general contractor; or any officer, director, stockholder, or partner of the general contractor has
any financial interest in the borrower.
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d. The general contractor advances any funds to the borrower.
e. The general contractor supplies and pays, on behalf of the borrower, the cost of any
architectural services or engineering services other than those of a surveyor, general
superintendent, or engineer employed by a general contractor in connection with its obligations
under the construction contract.
f. The general contractor takes stock or any interest in the borrower corporation as consideration
of payment.
g. There exists or comes into being any side deals, agreements, contracts, or undertakings entered
into or contemplated, thereby altering, amending, or canceling any of the required closing
documents, except as approved by the Secretary.
h. Any relationship (e.g. family) existing which would give the borrower or general contractor
control or influence over the price of the contract or the price paid to the subcontractor,
material supplier or lessor of equipment.
5. Incentive Fee Payments to Contractors.
The owner may request that the construction contract be modified before Initial Endorsement to
provide for a general contractor incentive fee for completed construction work and delivering a
completed project before the date specified in the construction contract (or as amended by HUDapproved time extension(s)). Incentive fees must be specified in an Addendum to the construction
contract that has been approved by HUD before initial endorsement or at the execution of a
construction contract that has been approved by HUD for Insurance Upon Completion and
Insurance of Advance projects. An Incentive Payment Addendum may not be added to the
contract after Initial Endorsement.
a. Identity of interest borrower and general contractor.
(1) General contractor may benefit from savings in construction interest, taxes, property
insurance, and mortgage insurance premiums to the extent there are construction cost
overruns.
(2) Incentive payment is included in the adjusted upset price of the construction contract.
If there is an identity of interest between the borrower and the general contractor, an incentive
fee may only be paid if there are certified cost overruns that were not included in a HUD
approved change order, and the amount of the incentive fee may not exceed the amount of
certified cost overruns that were incurred.
b. Nonidentity of interest borrower and general contractor.
(1) Use Construction Contract Incentive Payment, Form HUD-92443.
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(2) Include the incentive payment under “Other” on Form HUD-92331A.
Incentive fees must be calculated in accordance with Form HUD-92443. The incentive fee
computed for Lump Sum construction contracts may not exceed 50% of the amount by which
the estimated interest, taxes, property insurance and mortgage insurance premium, exceeds the
certified costs for these same items through the actual date of completion.
The incentive fee computed for Cost Plus construction contracts may be paid in an amount
calculated in accordance with the Incentive Payment Computation on page two of Form HUD92443. Additionally, when the cost plus contract is used the contractor may not receive total
payments that exceed: (1) the actual costs of construction, (2) the cash fee provided in the
construction contract, or (3) the incentive fee as determined by the computation. (The
contractor shall not be paid an incentive fee that is greater than the amount of cost overruns;
the contractor must only receive the amount of the incentive fee. Any excess of this amount
must be refunded to the borrower.)
6. Damages Clause. Apply the damages clause of the construction contract when the general
contractor does not complete the project on time. The clause holds the general contractor
financially responsible for the added soft costs resulting from the contractor’s delay.
a. Calculate the amount of actual damages and liquidated damages, using the lesser to determine
the adjusted upset price.
b. To determine actual damages, compute the actual cost of interest, taxes, insurance, and MIP for
the period from the scheduled completion date (as amended by HUD-approved change orders)
through the substantial completion date.
c. To determine liquidated damages multiply the daily liquidated damages rate from the
construction contract by the number of days between the scheduled completion date specified
in the construction contract, as amended by the HUD-approved time extensions, through the
substantial completion date.
d. Reduce the damages by the portion of the net operating income earned during the
liquidated/actual damage period.
e. For those cases where an administrative completion date has been established, use this date for
computing damages for cost certification purposes. However, the general contractor is
responsible for damages through the date of substantial completion.
7. A borrower must be a single asset mortgagor entity and thus cannot act as its own general
contractor, though there may be an identity of interest between the two parties.
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8. Incomplete Minor Items. The borrower’s certification of the amount due under the terms of the
construction contract may include the cost of minor items of on-site work that remain incomplete
under the construction contract.
B. Architect’s fee(s) are limited to the amounts paid in cash.
1. Recognize the cost of additional services set forth in Article 10 of the Standard Form of
Agreement between Owner and Architect for Housing Services, AIA Document B108. Ask
Architectural and Cost staff to check the reasonableness of these charges.
2. Disallow:
a. Any portion of the Architect’s fee paid in stock.
b. Any costs associated with a clerk of the works.
3. If any identity of interest comes into being between the Architect and either the borrower or
general contractor during project construction:
a. See maximum design Architect’s fee for cost certification purposes set forth in the Agreement
and Certification, Form HUD-93305M.
b. Do not allow a fee for supervisory services to an identity of interest Architect.
4. Treat any unused balance of the total Architect’s fee as a direct mortgage reduction to the original
mortgage amount on Form HUD-92580.
C. Interest is allowable in the amount accrued on the first mortgage between initial endorsement (start of
construction for insurance upon completion projects) and the cut-off date defined in Section 13.8.
1. Recognize interest costs associated with an approved early start provided:
a. The borrower entered into an agreement with the contractor which:
(1) Was approved by the Regional Center Director.
(2) Agrees to reimburse the contractor for interest on money borrowed for construction prior to
initial endorsement.
(3) States that reimbursement will be made only to the extent the borrower has funds available
in the amount estimated for interest during construction.
b. The certified amount, when added to the interest cost incurred directly by the borrower, does
not exceed the total amount of interest estimated in Section G of Form HUD-92264.
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c. Form HUD-92415, Request for Permission to Commence Construction Prior to Initial
Endorsement for Mortgage Insurance, was executed and approved.
d. Interest costs reflect the contractor’s actual cost of money borrowed to cover the cost of
construction between the early start date and the initial endorsement as adjusted by paragraph
e., below.
e. Rate of interest does not exceed the rate established for the insured loan.
2. Interest rate paid on the construction loan cannot exceed:
a. For insurance of advances: the rate stated in the Firm Commitment.
b. For insurance upon completion: the rate acknowledged by the Regional Center Director
before issuing the Firm Commitment.
3. Deduct accrued interest forgiven by the lender or otherwise not paid in cash.
4. Treat lender/bond underwriter’s refund of any portion of the construction loan interest to the
borrower or sponsor, as a direct mortgage reduction to the original mortgage amount on Form
HUD-92580.
5. If the construction interest rate changes before initial endorsement and it was not feasible to
reprocess the project or if tax exempt bonds were sold to finance the construction loan and the true
interest rate was not known until cost certification:
a. Interest savings may be created from the difference between the processed interest rate and the
actual final interest rate.
b. Treat these savings as a direct mortgage reduction if the following condition was included in
the Firm Commitment:
“Any interest savings resulting purely from a differential between the HUD processed interest
rate and the actual construction interest rate may not be construed as excess funds that may be
used to offset costs in other categories at the time of cost certification. Any such saving must
be applied as a mortgage reduction.”
6. Neither the interest on subordinated liens nor other obligations of the borrower are allowed as
certifiable costs.
D. Taxes are allowable in the amount accrued on the first mortgage between initial endorsement (start of
construction for insurance upon completion projects) and the cut-off date defined in Section 13.8. Do
not recognize costs accrued during the early start period.
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E. Property insurance is allowed in the amount accrued on the first mortgage between initial endorsement
(start of construction for insurance upon completion projects) and the cut-off date defined in Section
13.8. Do not recognize costs accrued during the early start period.
F. MIP. The FHA Comptroller’s office cannot compute the exact amount of MIP due during the
construction period until the project has been completed and the Washington Docket forwarded to
Headquarters.
1. For a project involving insurance of advances, allow the higher MIP rate applicable to the specific
FHA insurance program being used per annum on the mortgage amount on the basis of accrual for
the number of days in the period used to Paragraph C above, when applicable.
2. For a project involving insurance upon completion, no MIP is paid during construction.
G. HUD application, commitment and inspection fees are allowable in the amounts paid. Fees paid to
reopen an expired or terminated commitment are not allowable costs.
H. Financing expense includes the initial service charge, discounts fees, Ginnie Mae, permanent lender
commitment fees, and other similar fees.
1. Allow the lesser of:
a. Amounts paid, or to be paid, in cash.
b. Amounts shown on Form HUD-92434M, Lender’s Certificate (formally Mortgagee’s
Certificate), or Certificate of Lender portion of Form HUD-92455M approved by the Regional
Center Director before Initial Endorsement (Insurance of Advances) or issuance of Firm
Commitment (Insurance Upon Completion).
2. Construction lender’s initial service charges (usually 2%). Construction and permanent lenders’
fees in the aggregate cannot exceed 3.5% (5.5% for bond financed projects). The combination of
origination, financing, and permanent placement fees must include the amount for lender’s legal
fee and is expected to cover the following:
a. Processing fees.
b. All expenses of the lender’s counsel paid directly from the initial service charge. (Reconcile
separate invoices or bills with the cost of the itemized figures.)
c. All other charges by the construction lender.
d. Excludes:
(1) Construction loan discount.
(2) Construction loan extension fees.
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Chapter 13
Cost Certification
Allowable Costs in Borrower’s Certificate of
Actual Cost
Document page 437
e. Any charges made by the lender for payment of counsel services or charge paid directly to the
lender’s counsel, to the extent they cause the initial service charge to exceed 2 percent, are not
certifiable. Except, if charges are related to “Title and Recording” expenses certify these under
the same category, see Section 13.16.I below.
f. Lender’s permanent placement fee is usually 1.5%. It is expected to cover all permanent
placement expenses except discounts and some of the fees associated with a bond financed
transaction.
g. If Ginnie Mae Mortgaged Backed Securities are involved, the lender may not assess an
additional charge for the MBS application fee or for the custodial or delivery fee.
3. Recognize for cost certification:
a. Reasonable discounts based on current interest rates at the time of issuance of the Firm
Commitment for projects involving insurance of advances and insurance upon completion
charged by the construction and permanent lenders. Recognize extension fees charged by the
construction lender if funded at initial endorsement and shown on the Lender’s Certificate,
Form HUD-92434M (formally Mortgagee’s Certificate).
b. Permanent lender extension fees, shown on Form HUD-92434M, if funded before the
substantial completion date.
c. For Insurance Upon Completion cases, construction and permanent loan extension fees, shown
on the Certification of Mortgagee portion of Form HUD-92455M, if funded before cost
certification cut-off.
d. Financing fees (including extension fees and discounts) paid on behalf of a borrower by a third
party under Paragraph 18(f) of the Lender’s Certificate or Paragraph 10h of Certificate of
Lender portion of Form HUD-92455M and shown as a current liability on the borrower’s
balance sheet to the extent there are savings in the mortgage. At final endorsement, require a
promissory note be used for any unpaid balance of the obligation recognized in cost
certification.
e. For bond financed projects, cost of issuance, discounts, and financing fees in excess of 5.5%;
provided the cost certification evidences that the sponsor/borrower cannot benefit monetarily
from excess investment income from the proceeds of the invested obligations. Refer to Section
8.15.
4. Do not recognize for cost certification:
a. Any “side deals” (except for approved discounts) by which the borrower agrees to pay
additional sums.
b. The 4% construction loan and 1.75% permanent loan Ginnie Mae indemnification escrows.
c. Discounts required to buy down the construction and/or permanent rate to a below market rate.
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13.16
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5. Treat the following as a direct mortgage reduction at final endorsement:
a. Premiums paid by lender to the borrower or sponsor for acquiring the construction or
permanent loan.
b. Partial refunds of the Commitment fee allowed in processing, which are returned to the
borrower or sponsor.
c. Discounts or other fees paid for by a contribution of a portion of the initial service charge by
the lender/bond underwriter.
d. Rebates paid to a borrower or sponsor by the lender/bond underwriter for bond -financed
mortgages.
I. Title and recording expense is limited to cash paid for:
1.
2.
3.
4.
5.
6.
7.
Title search and policy at the time of initial endorsement;
Recording fees at initial endorsement;
Mortgage and stamp taxes;
Survey recording fees;
Updating title policy during construction;
Final title policy and recording charges; and
Legal fees incurred with any of the above.
J. Legal, organization and audit expenses are limited to expenses incurred in organizing the borrower
entity, developing the proposal to submit to HUD and other necessary governmental agencies and
required services during closing and construction.
1. Organizational allowance:
a. Allow only the amount included in Section G of Form HUD-92264 for the organizational fee,
unless the borrower, who justifies the need for and reasonableness of the additional
expenditure, submits fully supporting documentation.
b. Any costs incurred in excess of this allowance are not eligible for recognition in processing a
mortgage increase or the equity computation on Form HUD-92580.
2. Limit the borrower’s legal expenses to those incurred for: initial through final closings, tax advice
during organization of borrower entity only, and preparation of documents and representation for
and during organization of the borrower entity.
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a. Allow customary expenditures expected to be incurred before and during initial closing,
construction period, and final closing.
b. Do not allow:
(1)
Expenses connected with land acquisition which is already included in, or contributing
to:
(a) Title and recording expense.
(b) Estimated market price of site.
(c) Obtaining changes in zoning.
(2)
Cost of legal services to create tax shelters, trusts, etc.
3. Recognize cost of a “package deal” for organization and legal services provided:
a. Supplier is qualified to furnish the needed services.
b. Do not allow duplicate credit for the same services.
4. Audit fee covers the cost of the accountant’s audit and opinion of the borrower’s certificate of
costs.
5. Amounts included in Form HUD-92264 for legal and audit expenses are not blanket allowances,
but ordinarily set an upper limit on allowable amounts.
a. Non-typical fees must be borne by the borrower, unless in an exceptionally complex case, a
higher fee is proven by the borrower to be necessary and reasonable. Detailed invoices and/or
other documentation is required as to the reasonableness, purpose, necessity and proper
classification of all items in the category.
b. This limitation is not flexible where a “package” for legal and organizational services is
involved or where a substantial amount of the legal and organizational services are performed
by the same firm.
K. Offsite Costs. Where the borrower enters into a supplemental contract for constructing offsite
improvements, allow the lesser of:
1. Contract price as adjusted by HUD’s estimated cumulative effect of approved offsite change
orders.
2. Actual cash paid or to be paid for offsite work.
3. Amount allowed by cost analyst for offsite construction of Form HUD-92331, Summary of Cost
Certification Review - Cost Section.
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Chapter 13
Cost Certification
Allowable Costs in Borrower’s Certificate of
Actual Cost
Document page 440
NOTE:
a. The Valuation Branch must adjust the as-is land value of the property, if the allowed amount
for offsite and demolition differs from HUD’s estimate on Form HUD-92264 issued at Firm
Commitment.
b. Offsite costs are not allowable for leasehold estates when the ground rent is based on a land
value that reflects all required offsite improvements since the borrower has not paid for those
improvements.
c. If the borrower certifies to off-site costs, the land value entered on Form HUD-92580,
“Maximum Insurable Mortgage” will be reduced by the amount of off-site costs.
L. Other costs include all costs and/or recovery of costs which are not provided for elsewhere and which
are clearly attributable to the actual cost of the project.
1. Cost of acquiring the leasehold interest provided the acquisition cost plus ground rent and offsite
costs paid by the borrower, if any; do not exceed the HUD Fair Market Value of the Land Fully
Improved. Any excess is to be reflected as a disallowed cost of acquiring the leasehold.
2. Ground rent paid during the period of the first mortgage between initial endorsement (start of
construction for insurance upon completion projects) and the cut-off date as defined in Section
13.8.
3. Incentive payment due a nonidentity of interest contractor for completing construction before the
scheduled completion date as amended by HUD-approved change orders.
4. Compensation from an insurance claim including any income earned by investing the proceeds of
the claim. Treat as recovery of cost after computing BSPRA.
5. Contractor’s bond premium if paid by the borrower. If the construction contract contained an
amount for the bond premium, subtract it from the contract amount when developing the adjusted
upset price on line 1c of Form HUD-92331A.
6. Other fees, including engineering and topographical survey. Cost staff must determine if such
costs are reasonable and not duplicated in the general contractor’s costs.
7. Contingency reserve is included in the replacement cost of substantial rehabilitation projects.
a. The contingency reserve may be used for unforeseen costs of necessary items and betterment
change orders approved by HUD and unanticipated soft costs for time extensions approved by
HUD.
b. Expenditures for change orders and shortfalls in soft costs should be certified to and allowed
under those specific line items.
c. Normally there will not be an amount certified to under contingency reserve since all
expenditures will be certified to on other line items.
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Cost Certification
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Actual Cost
Document page 441
d. An itemization of all expenditures covered by contingency reserve funds must be attached to
the cost certification submission.
8. Grants, governmental loans or tax credit equity used to pay for allowed cost items.
a. Should be treated as a recovery of cost after BSPRA.
b. Do not deduct grant, loan or tax credit equity funds from the total recognized costs when the
funds were used to pay for the non-replacement cost items, i.e., used toward but not limited to:
paying the acquisition cost of the land in excess of the HUD allowance, the operating deficit,
working capital and items on Form HUD-2880, Applicant/Recipient Disclosure.
9. Residential relocation fund established on Form HUD-92264. Allow only those expenses approved
by HUD up to the amount established on Form HUD-92264. Apply unused allowance as a direct
mortgage reduction.
10. Third Party costs for appraisals, market analysis, PCNA etc., are no longer recorded in Other Fees
and should be included with Organizational Cost line items (refer to Chapter 3).
M. BSPRA.
1. HUD does not control the division of BSPRA.
2. Compute BSPRA without regard to amounts on Form HUD-92264 based on a percentage of
allowed costs.
a. Use the same percentage (not to exceed 10%) in the Firm Commitment review.
b. Exclude from the computation the cost of off-site work, land, payments for acquisition of
leasehold, ground-rent, relocation expenses, and supplemental management funds, and Major
Moveable Equipment, if applicable.
3. 50/75% rule.
a. Whether or not there is an identity of interest, no general contractor’s fee (general overhead
and profit) will be allowed when:
(1) More than 50% of the contract sum in the Construction Contract–Cost Plus, Form HUD92442M, is subcontracted to one subcontractor, material supplier or equipment lessor, or
(2) 75% or more with three or less subcontractors, material suppliers and equipment lessors.
NOTE: If two or more subcontractors have common ownership, they are considered as one
subcontractor.
b. Exceptions: The 50/75% rule is not applicable to:
(1) Manufacturers of Industrialized Housing.
(2) Trade items performed by persons on general contractor’s payroll.
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Cost Certification
Cost Review of Contractor’s Cost Certification
Document page 442
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(3)
Supplemental Loan program.
(4)
Rehabilitation programs other than substantial rehabilitation.
c. The cost analyst determines the applicability of the 50/75% rule.
d. Where the 50/75% rule is violated, the general contractor forfeits its profit and only Sponsor’s
Profit Risk Allowance (SPRA) is allowed.
4. Where there is no identity of interest between the borrower and builder or when the 50/75% rule
has been violated, compute a SPRA which is 10% of allowable:
a. Architectural fees.
b. Carrying charges and financing.
c. Legal, organization, and audit expenses.
5. If an identity of interest between the borrower and general contractor is established after initial
endorsement and exists at the time of substantial completion, BSPRA is allowed in lieu of a
builder’s profit and SPRA.
6. If prior to the substantial completion date an identity of interest no longer exists between the
borrower and builder, substitute SPRA for BSPRA.
a. The construction contract may be amended to permit a typical builder’s profit.
b. Treat the difference between BSPRA and the combination of SPRA and builder’s profit as a
direct mortgage reduction on Form HUD-92580.
N. Non-Profit Developer Fee. The allowable amount is included in the Firm Commitment less amounts
certified and allowed on other line items.
13.17
Cost Review of Contractor’s Cost Certification
A. Actual costs are all costs, paid by the general contractor under the Construction Contract for
completion of the project, and to which the general contractor certifies, using Form HUD-92330A.
1. Include actual costs paid in cash, or to be paid in cash (such as items of delayed completion),
within 45 days after the date of the substantial completion, for labor, materials, equipment,
subcontract work, general requirements (job overhead), fees and general overhead. Also
include amounts estimated for any items requiring an escrow.
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Chapter 13
Cost Certification
Cost Review of Contractor’s Cost Certification
Document page 443
a. General Requirements:
(1)
May include salaries of clerical staff for time actually spent at the project site. Prorating
of annual salaries on the percent basis is not permitted.
(2)
Salaries of executives may not be included in General Requirements. Such salaries are
included in General Overhead.
b. General Overhead:
(1)
Include only the amount of the accepted Schedule of Values, Form HUD-2328, adjusted
by the effect of approved change orders.
(2)
Itemization is not required.
2. Kickbacks, rebates, adjustments, discounts, or any other devices which the contractor may have
received or is entitled to, must be deducted from actual costs.
B. For those cases where the borrower is not seeking a mortgage increase or a detailed review is not
requested by the Regional Center Director:
1. The cost analyst will not review Form HUD-92330A, Contractor’s Certificate of Actual Cost, in
assisting the Mortgage Credit Examiner in the analysis of the borrower’s cost certification.
2. The cost analyst will advise Mortgage Credit Examiner of the approved change orders.
C. Cost Review
1. Conduct a detailed review when the borrower applies for a mortgage increase or the Regional
Center Director orders a detailed review.
2. Review certifications where required from the contractor, or any subcontractor, equipment lessor,
material supplier or manufacturer of industrialized housing.
3. Forms necessary to make reviews:
a. Form HUD-92330, Borrower’s Certificate of Actual Cost.
b. Form HUD-92330-A, Contractor’s Certificate of Actual Cost.
c. Form HUD-93305M, Agreement and Certification.
d. Form HUD-92437, Request for Construction Changes–Project Mortgages.
e. Form HUD-92326, Project Cost Estimate (HUD Estimate).
f. Form HUD-2328, Contractor’s and/or Borrower’s Cost Breakdown.
g. Form HUD-92331-B, Cost Certification Review Worksheet.
h. Form HUD-92331, Summary of Cost Certification Review.
i. Form HUD-95379, Trip Report.
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Cost Certification
Cost Review of Contractor’s Cost Certification
Document page 444
Chapter Index / Section Index
4. Steps to conduct the review:
a. 50/75% rule check. Use information from the “total” and “name of subcontractor or
payee” columns of the general contractor’s cost certification. If the rule applies, disallow
the general contractor’s general overhead and profit. If the project uses BSPRA, disallow
only the general overhead and inform the Mortgage Credit Examiner.
b. Identity of interest subcontract review (for borrower, general contractor, subcontractors,
equipment lessor, material suppliers, and industrialized housing manufacturers):
(1)
Examine Form HUD-93305M and Form HUD-92330-A to establish all declared
identities of interest.
(2)
Review each identity of interest subcontractor’s cost certification.
NOTE: If cost certification not received, disallow subcontractor’s overhead, profit, and all
questionable costs.
(a) If no prior approval as an identity of interest subcontractor, disallow subcontract
overhead and profit.
(b) For prior approval:
(i)
Allow prior approved subcontract overhead and profit, plus or minus the effect of
approved change orders. Disallow excess.
NOTE: Do not reduce the prior approved subcontract overhead and profit in the
event that the certified cost for the work is less than the prior approved maximum
subcontract price.
(ii) Allow up to the prior approved maximum subcontract amount for work, plus
or minus the effect of approved change orders. Disallow excess.
5. Trade line item review:
a. On Form HUD-92331-B.
(1) Enter all trade line costs from HUD estimate (Form HUD-92326) or Contractor’s
schedule of values (Form HUD-2328) after adjusting for approved change orders.
(2) Enter all trade line costs from general contractor’s cost certification (Form HUD-92330-A).
Take architect’s fees from borrower’s cost certification (Form HUD-92330).
(3) Using dollar and percentage variance columns compare each trade’s actual cost with the
estimate. Determine allowable amounts.
b. Allowable amounts are not limited by the estimates. Analyze differences.
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Chapter 13
Cost Certification
13.18Determination of the Non-profit Borrower’s Initial
Equity Investment
Document page 445
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(1) Allow actual costs paid to complete the work in accordance with the construction contract.
(2) Allow actual costs due to unusual circumstances, e.g., subcontractor bankruptcy, code
changes, required replacement of completed work, replacements due to natural occurrences
(storms, floods, earthquakes, etc.).
c. Question only amounts substantially in excess.
(1) Contact general contractor and/or borrower requesting explanation or more documentation.
(2) Make disallowances if explanation/documentation is not received in a reasonable amount
of time.
(3) Only the accountant may make reallocation of monies from one trade item to another.
(4) As a result of discussion, have the accountant amend Form HUD-92330-A and resubmit.
d. Disallow any amount not justified or supported as being part of the construction contract work.
e. Disallow costs for duplication of work due to contractor’s error or negligence, e.g., improper
placement, failure to protect, noncompliance with contract, etc.
D. Summary of Cost Certification Review on Form HUD-92331.
1. Enter all recommended disallowances.
2. Enter summary of construction contract costs.
3. Enter contractor’s profit from borrower’s Form HUD-92330. Add profit from all HUD approved
change orders.
4. Enter offsite costs from borrower’s Form HUD-92330, if applicable.
a. Review itemized offsite breakdown.
b. Disallow any cost duplication on general contractor’s Form HUD-92330-A.
5. Property Insurance Schedule, Form HUD-92329. Complete new form using allowed construction
costs.
E. Lump Sum Construction Contract Cost Certification.
1. Review borrower’s certification (Form HUD-92330) if requested to do so by Regional Center Director.
2. Review cost certification of any subcontractor that has identity of interest with the borrower.
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13.18
Determination
Investment
of
Chapter 13
Cost Certification
13.18Determination of the Non-profit Borrower’s Initial
Equity Investment
Document page 446
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the
Non-profit
Borrower’s
Initial
Equity
The Non-profit borrower will be permitted a 6% return on its initial equity as computed on Form HUD-92580,
Maximum Insurable Mortgage.
A. The base equity is determined as follows:
1. New Construction: Line 6, Form HUD-92580, minus finally endorsed mortgage determined in line
10 of the form.
2. Rehabilitation–Property Owned: Reduce the sum of line 4, Form HUD-92580, plus HUD’s
estimate of the “as is value” of the existing land and improvements before rehabilitation, by the
finally endorsed mortgage determined in line 10 of the form.
3. Rehabilitation–Property Acquired: Reduce the sum of line 4, Form HUD-92580, plus the lesser of
HUD’s estimate of the “as-is value” of the existing land and improvements before rehabilitation or
the acquisition cost of the property, by the finally endorsed mortgage determined in line 10 of the
form.
4. Rehabilitation under Section 220 and 221(d)(4): Use the New Construction formula in paragraph
A.1 above.
B. The base equity computed in paragraph A.1 above may be increased by:
1. The cost of furnishing, fixtures, equipment or other necessary items and betterments essential to the
operation of the project.
2. The non-profit developer’s fee used to reduce the estimate closing costs of the project.
3. Grants from national, regional, and local community service organizations (non-government
source).
4. Sponsor’s cash contribution for the cost of land over and above what HUD has allowed.
C. Modify the Regulatory Agreement to require the return on equity be used for:
1. Continued affordable housing initiatives; or
2. Pledged to the repayment of surplus cash or residual receipts notes held as secondary financing.
D. Asset Management will monitor the non-profit borrower to be certain that the return on equity is used
only for permissible purposes.
E. The return on equity is paid from surplus cash/residual receipts. Any shortfall in the permitted return
in one year may be made up from surplus project funds in a future year.
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Cost Certification
Determine the Borrower’s Initial Investment
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Determine the Borrower’s Initial Investment
A. New construction and substantial rehabilitation projects under Sections 220 and 221(d)(4): Line 6,
Form HUD-92580, minus the maximum insurable mortgage determined in line 10 of this form.
B. The amount determined by above Paragraphs A may be increased by:
1. Expended working capital funds not recognized in the cost certification review.
2. Residential relocation expenses approved by HUD in excess of the amount established on Form
HUD-92264, Section G, and Section O, Remarks and Conclusions.
C. Distributions. Mortgagor or any Affiliate or Principal shall not make, receive or retain any distribution
of assets or any income of any kind from the project, except from Surplus Cash (per the Regulatory
Agreement, Form HUD-92466M). This limitation does not apply to interim income generated during
construction, but project income as it relates to the surplus cash calculation.
13.20
Section 223(f) Modified Form of Cost Certification
A. Complete and submit a modified form of cost certification for review 15 days before the
initial/final endorsement of the loan for insurance for all projects processed pursuant to Section
223(f); except those 207/223(f) refinancing transactions where 80% or less of value is the
controlling criterion. (In such case cost certification is not required.) Unlike other cost
certification procedures, savings from one line item cannot offset cost overruns on another line item.
As you complete the cost certification and there is a cost savings, you must recalculate the maximum
insurable mortgage. Refer to Form HUD-2205-A’s instructions.
1. The borrower must certify to the total actual costs incurred in the acquisition or refinancing of the
property. The certification must be submitted on Form HUD-2205-A, and it must be dated and
signed by an authorized agent of the borrower.
2. The lender must submit the certification to HUD for computation of the maximum insurable
mortgage and completion of Section II of Form HUD-2205-A.
3. If, in a purchase transaction, the amount of the acquisition cost determined allowable at cost
certification exceeds the estimate of value, that was determined during processing, the rent
formula shall be recomputed. This re-computation may be accomplished using the allowable
acquisition cost as determined by cost certification and the dollar amount of secondary
financing represented by the approved promissory notes (Form HUD-92223).
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Chapter 13
Cost Certification
Special Instructions for Substantial
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B. The borrower must submit 15 days after repairs are complete a supplemental cost certification for
deferred repairs for an escrow that was established at initial/final endorsement to complete non-critical
repairs. In cases where the actual costs are less than estimated, you must recalculate the maximum
insurable mortgage. If the maximum insurable mortgage is reduced based upon this recalculation of the
lower actual costs, the borrower must either:
1. Have the required prepayment deducted from the repair escrow , or
2. Deposit proceeds into the project’s replacement reserve account, or
3. Provide the required prepayment to the lender.
13.21
Special Instructions for Substantial Rehabilitation
NOTE: Cost certification instructions (set by statute) dictate that the lesser of the “as is” value of the land
and improvements (before repair or rehabilitation) or the purchase price of the land and improvements, is
used in the cost build up for Criterion 3 of Form HUD-92264-A, in substantial rehabilitation cases.
Consequently, when mortgage proceeds will be used to fund the acquisition of the property, the “as is”
value estimation will be used as a test of the reasonableness of the acquisition price.
When the acquisition price is less than the “as is” value of the land and improvements (as accepted by
HUD), and mortgage proceeds will be used to fund the acquisition of the property, the acquisition price
will be used in the cost build up for Criterion 3 forming the cost basis for the Firm Commitment.
When the acquisition price exceeds the “as is” value of the land and improvements (as accepted by HUD),
and mortgage proceeds will be used to fund the acquisition of the property, then the “as is” value will
comprise the basis of the cost build up for the Firm Commitment.
When mortgage proceeds will not be used to fund the acquisition of the property, the “as is” market value
of the property will be used in the cost build up for Criterion 3 forming the cost basis for the Firm
Commitment. This is particularly significant when below market rent restrictions (such as in the case of
LIHTC limited rents or Section 8 rent subsidy) are in place and the use of market rents in valuing the
property will result in a premium over these rent restrictions. (See Section 7. 13.C, on defining how rents
are derived as the basis for the “as is” value).
13.22
Mortgage Reduction after Cost Certification
A. The National Housing Act requires that the mortgage will not exceed the applicable percentage of actual
costs. If certified actual costs are lower than original projected cost as reflected in Form HUD-92264, a
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reduction in mortgage may be applicable. The Agreement and Certification, Form HUD-93305M, also
addresses this issue and provides that where the HUD accepts, for cost certification, estimates of cost for
any item, the later substitution of certified actual costs may require a reduction of the mortgage.
B. Reductions of cost may arise from:
1. Refunds, rebates, or discounts.
2. Excess of escrows over the actual costs of incomplete construction items.
3. Refunds of deposits made by the borrower to prevent losses to the lender from loss in connection
with sale of the mortgage.
4. Settlement of claims against bonding companies or others after project completion.
C. At final endorsement, the borrower must set up a cash escrow to pay all "to be paid in cash items"
identified on Form HUD-92330, Borrower's Certificate of Actual Cost, and debts to third parties who
made the original disbursement for an item listed as paid on Form HUD-92330.
1. Reconcile the difference between:
a. Obligations listed on Form HUD-92023M, Request for Final Endorsement of Credit Instrument
or HUD-92455M (for Insurance upon Completion Projects only), and
b. The "to be paid" column on Form HUD-92330 plus debts to third parties.
2. Paid receipts must support differences and a statement from the borrower identifying by name and
cost, those items paid in cash. The receipts and statement are affixed to Forms HUD-92023M or
HUD-92455M.
3. Do not accept personal or business checks issued by the borrower at final endorsement as evidence
of payment. Payment must be in certified or cashier checks.
4. Prepare a new Form HUD-92331A to disallow obligations listed as "paid" or "to be paid" on Form
HUD-92330, which are represented at final endorsement as paid by HUD-approved notes. Prepare a
new Form HUD-92580 from the total of HUD-approved cost of revised Form HUD-92331A.
5. Undisbursed mortgage proceeds may supplement or satisfy the cash escrow.
6. Use Form HUD-92476.1M, Escrow Agreement for Non-Critical, Deferred Repairs (formally Escrow
Agreement for Unpaid Construction Costs):
a. To set up the cash escrow.
b. Attach a detailed listing of the unpaid costs.
7. Use Form HUD-92464M, Request for Approval of Advances of Escrow Funds to disburse escrow.
8. Escrow should be disbursed within 45 days after final endorsement. If all of the funds are not
disbursed follow the procedures in Section D below.
9. At final endorsement, if all obligations have been paid in cash, nothing else is needed.
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13.23
Chapter 13
Cost Certification
Increase in Mortgage Amount
Document page 450
Chapter Index / Section Index
D. Sixty days after final endorsement:
1. Prepare a new Form HUD-92331A. Enter under the column heading:
a. "92264" - the amount of each item of cost recognized from the earlier Form HUD-92331A
"Allowed" column.
b. "92330/92330A" - the amount listed in Column C of the Borrower's Certificate of Actual Cost,
Form HUD-92330, for each item of cost.
c. "Allowed" - the amounts paid in cash based on the reconciliation performed in Section B above
and disbursements from the cash escrow account.
d. "Disallowed" - the lower of the amounts previously allowed or paid in cash.
2. Compute a new Maximum Insurable Mortgage, Form HUD-92580, based on the total of the
"Disallowed Column" (Form HUD-92331-A). If this computation produces an amount less than the
mortgage finally endorsed:
a. Notify the Directors of Housing Production and Management by memorandum that prepayment
to the mortgage is required.
b. Prepayment is mandatory and is applied:
(1) In amounts equal to the scheduled monthly principal payments, to the extent possible.
(2) Any remainder goes to the Reserve for Replacements Fund.
c. If HUD is notified that payment has been delayed because of a dispute or litigation, retain funds
to pay the amount pending resolution of the dispute.
d. Notify the lender or escrow agent by letter of the required prepayment.
e. Control the remaining balance in a special account, as a reserve for unpaid construction costs from
which disbursements may be made only after written consent of the Regional Center or Satellite
Office.
3. The lender will continue to use the existing amortization schedule for servicing the mortgage.
a. The prepayment is in addition to the regular monthly payments to principal.
b. There is no adjustment in the amount of the annual MIP due because of these mandatory
prepayments.
4. The escrow requirement does not apply to funds the general contractor owes. However, the general
contractor must submit a reconciliation of its "to be paid" items.
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13.23
Chapter Index / Section Index
13.23
Chapter 13
Cost Certification
Increase in Mortgage Amount
Document page 451
Increase in Mortgage Amount
A. Timing. Requests for a mortgage increase will not be considered until the project is complete, cost
certification has been submitted, and the Final Endorsement will likely be achieved immediately
following processing of the mortgage increase and the conditions in paragraph B below are met.
B. Bases for considering a mortgage increase:
1. Necessary changes that arise from differing site conditions (as defined in the construction
contract).
2. Compliance with local codes.
3. Unforeseen conditions that might affect the safety and health of occupants.
4. Betterment changes that are economically justified e.g., those that produce significant cost savings
to project operation, can be reflected in increased income expectancy, or enhance the security of
the mortgage.
5. Costs caused by extensions in construction time, when such extensions: are approved by HUD;
justifiable under AIA General Conditions; and caused by problems beyond the contractor’s
control. Other costs not known at Firm Commitment resulting from requirements of local
authorities and beyond the borrower’s control.
6. Construction hard cost increases caused by a natural disaster declared by Federal or State
government, to the extent not covered by casualty insurance.
7. Increased costs resulting from concealed subsurface site conditions, provided it is determined
those exploratory tests during project design were sufficient and thorough and neither the architect
nor engineer was at fault.
8. Cost of substituting a general contractor when the original general contractor is terminated for
cause and the surety has failed to perform.
9. To correct a substantial HUD error in the original processing that would otherwise result in serious
inequities.
10. Any mortgage increase for an insured project must be more than 2.5% of the original mortgage
and at least $50,000.
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13.24
13.24
Chapter 13
Cost Certification
Restrictions on Mortgage Increases
Document page 452
Chapter Index / Section Index
Restrictions on Mortgage Increases
A. A mortgage increase may not be granted for cost overruns associated with: completion of the work
in accordance with the original contract documents by the original contractor, changes made
primarily for the convenience of the borrower or contractor, nor for the aggrandizement of the
borrower or contractor.
B. Cost overruns are not a basis for granting a borrower’s request for mortgage increase nor are changes
made primarily for the convenience or aggrandizement of the borrower or contractor.
C. Any mortgage increase for an insured project must be more than 2.5% of the original mortgage
and at least $50,000.
D. The increase must be supported by net income under Criterion 5 of Form HUD-92264-A.
E. A mortgage increase may not be granted for replacing a contractor where the borrower sets up a
“straw contractor” for purposes of BSPRA.
13.25
Processing a Mortgage Increase
Technical processing consists of Step One through Step Four below. The four steps to processing a
mortgage increase, depending on the condition being considered:
A. Step One: Use the alternative applicable to the condition being considered:
1. Alternative One, applicable to necessary items and betterment change order cost increases:
a. Architecture and Valuation staffs review the change orders to determine eligibility for
processing a mortgage increase. Architecture further reviews for the added cost.
b. Mortgage Credit computes the allowable costs on Form HUD-92331-A, Cost Certification
Review Worksheet–Mortgage Credit Staff, Line 1.d. Reduce this amount by the cost
attributable to any change order(s) not qualifying for a mortgage increase.
c. The adjusted hard cost forms the basis of the mortgage increase computation
2. Alternative Two, applicable to contract time extension soft cost increases:
a. Mortgage Credit computes the allowable costs on Form HUD-92331-A, Cost Certification
Review Worksheet–Mortgage Credit Staff, Line 3 through 6.
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13.25
Chapter 13
Cost Certification
Processing a Mortgage Increase
Document page 453
b. The adjusted soft cost forms the basis of the mortgage increase computation.
3. Alternative Three, applicable to construction contract cost increases due to a change in the
contractor:
a. A&E staff computes a new Form HUD-2328 and Form HUD-92264, Section G through
Line 50.
b. Mortgage Credit staff computes the allowable costs of Form HUD-92331-A, Cost
Certification Review Worksheet–Mortgage Credit Staff, Line 1.c. for hard cost increases
between the original contractor and the contractor completing the work, and Lines 3
through 6 for soft cost increases associated with the change in contractor.
c. The adjusted hard and soft costs form the basis of the mortgage increase computation.
4. Alternative Four, applicable to substantial error in HUD cost processing:
a. A and E staff complete a new Form HUD-2328, and Form HUD-92264, Section G through
line 50.
b. Mortgage Credit computes the allowable costs on Form HUD-92231-A, Cost Certification
Review Worksheet–Mortgage Credit Staff, Line 1.c, using the criteria in paragraph c.
below.
c. The allowable construction costs for processing the increase will be based upon the lesser
of:
(1) The amount of the construction cost certified by the borrower, or
(2) The upset price of the construction contract as adjusted by approved change orders
eligible for a mortgage increase, plus the increases resulting from correcting or errors in
the original processing.
d. The adjusted hard cost forms the basis of the mortgage increase computation.
NOTE: The mortgage credit examiner must not use the adjusted upset price of the
construction contract as a limiting criterion at cost certification where there is a substantial
error in HUD cost processing.
B. Step Two: Mortgage Credit must compute (for use by Valuation in completing Form HUD-92264)
the eligible costs and fees for the following: architect’s fees, bond premium if paid by the borrower,
other fees not included in the construction contract and paid by the borrower, interest, taxes,
insurance, developer’s fee (if applicable), legal, organizational and audit fees, marketing (if
applicable), offsite costs, as-is land value and “as-is” value of property (if applicable). Mortgage
credit must comply with the following in computing the costs and fees.
1. Do not increase BSPRA or restore Contingency Reserve or non-profit’s Developer’s Fee.
2. Do not include non-mortgageable items (construction or permanent loan extension fees;
discount rate, maintenance fees, etc.)
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13.26
Chapter 13
Cost Certification
Authorization to Reopen Mortgage Transaction
Document page 454
Chapter Index / Section Index
3. Offset non-mortgageable items by net income (net non-proprietary income, if applicable) to
offset amount of mortgage increase, and
4. For increases caused by natural disaster:
a. Consider in the revised cost any increases from any interim closing for: carrying charges,
financing fees, and legal fees. Do not include any cost due to construction delays before the
disaster,
b. Cut the new estimated replacement cost by the amount of any actual recovery through
insurance proceeds, and
c. Require prepayments to be made for any late recovery of insurance proceeds.
C. Step Three. Valuation must use the costs and fees developed by Mortgage Credit in Step Two in
revising Form HUD-92264. Valuation must consider each of the following:
1. Examination fee, initial service fee, Ginnie Mae fee, inspection fee, MIP, and title and
recording based on the approvable increased mortgage amount.
2. Net income derived from market rent, expense and occupancy estimates current as of the date
of mortgage increase processing.
D. Step Four. Mortgage Credit must prepare a revised Form HUD-92264-A, using the revised Form
HUD-92264 and Trial Form HUD-92264-A prepared by Valuation in Step Three.
13.26
Authorization to Reopen Mortgage Transaction
A. HUD must advise the lender of its approval or denial of the request for a mortgage increase upon
completion of technical processing. Use Specimen Letter–Agreement Authorizing Reopening of
Mortgage Transaction (Appendix 13A), to notify the mortgagee, where a determination is made to
increase the mortgage.
1. Approval of a mortgage increase is subject to the payment of the following fees based on the
amount of the increase.
a. Application Fee of $3.00 per thousand of the increase.
b. Inspection Fee of $5.00 per thousand of the increase is applicable only when the increase
involves construction hard costs.
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13.27
13.27
Chapter 13
Cost Certification
Deferment of Principal Payments
Document page 455
Chapter Index / Section Index
Deferment of Principal Payments
The lender must obtain an agreement from the investor in the Ginnie Mae security and support the request
for deferment of principal payments.
A. HUD may consider requests for deferment if:
1. There is a delay in construction; or
2. The project requires additional time to reach sustaining occupancy.
B. HUD may approve the request when:
1. There are sufficient funds outside the mortgage proceeds for payment of interest overrun
confirmed either by:
a. Written assurance from the sponsor, or
b. Exercise of action against the contractor.
2. The borrower shows reasonable effort to complete construction and attain sustaining
occupancy.
C. The period of deferment is the additional time necessary for the borrower to stabilize its operation.
D. Deferment Letter. Use Appendix 13B, Specimen Letter – Agreement Authorizing Deferment of
Principal Payments for Level Annuity Monthly Payment, and distribute copies in accordance with
Section 13.28 below.
E. Deferment Instruments. The Regional Center Director is authorized to approve modifications of the
principal and interest payment as may be necessary to effect the deferment of principal payments.
13.28
Document Distribution
A. Form HUD-92580, Maximum Insurable Mortgage.
1. Lender–original and one executed copy.
2. One executed copy to each of the following: Closing Attorney, Mortgage Credit Control File,
Washington Docket, Regional Center or Satellite Office Docket, Regional Center or Satellite
Office Valuation Data Bank.
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Chapter Index / Section Index
Chapter 13
Cost Certification
13.29 Office of Inspector General
Document page 456
B. Cost Certification Documents. Original documents filed in the Washington Docket and one copy in
the Regional Center or Satellite Office Docket.
13.29
Office of Inspector General
The Regional Center Director should refer borrowers to the Office of Inspector General to evaluate the
borrower’s and/or contractor’s books where discrepancies appear to arise from other than inadvertent
error, or creditable misinterpretation of applicable criteria. Do not issue Form HUD-92580, Maximum
Insurable Mortgage, before completion of an OIG audit or investigation initiated before its issuance. A
referral must also be requested for any indicated fraud or material misrepresentation detected after
issuance of Form HUD-92580.
13.30
Cost Certification Incontestability
After HUD approves the certifications and issues Form HUD-92580, Maximum Insurable Mortgage, they
are final and incontestable unless there is fraud or material misrepresentation by the borrower, general
contractor, or subcontractors.
13.31
Post Closing Escrows
Post-Closing Escrows must be set up at final closing to pay all “to be paid in cash” items identified on
Form HUD-92330, Borrower’s Certificate of Actual Cost, and debts to third parties who made the original
disbursement for an item listed as paid on Form HUD-92330. These amounts may be adjusted for
payments made between the cut-off date and the date of final closing.
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Chapter 14
Low Income Housing Tax Credit (LIHTC) and Other Tax
Credit Program Guidance
14.1
Introduction
Chapter Index / Section Index
Document page 457
Chapter 14
Low Income Housing Tax Credit
(LIHTC) and Other Tax Credit
Program Guidance
14.1
Introduction
The Low Income Housing Tax Credit (LIHTC) program was enacted as part of the Tax Reform Act of
1986. It is administered by the Treasury Department and State Housing Finance Agencies (HFAs). In
July 2008, the Housing and Economic Recovery Act (HERA) provided statutory rulings for FHA
multifamily program changes, to facilitate the use of insured mortgages with LIHTC developments.
This chapter outlines policies and procedures for underwriting and reviewing FHA multifamily mortgage
insurance applications for projects using Low Income Housing Tax Credits. Standard processing of such
applications applies except as modified below, and all Tax Credit projects are underwritten using the
“single underwriter model”. Underwriters assigned Tax Credit Projects must have specialized training for
Tax Credit Project underwriting. Guidance provided here addresses all LIHTC projects underwritten for
FHA insurance but additional, separate guidance is also provided for LIHTC projects that are processed
through the FHA Tax Credit Pilot Program, referred to using the full program name or as “the Pilot
Program.”
14.2
Affordable Housing Underwriting and Program Guidance In Other
Parts of the MAP Guide
Guidance for processing and underwriting insured loans for affordable housing projects under the various
mortgage insurance programs can be found in several other chapters of this Guide, noted in the chart
below:
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Chapter 14
Low Income Housing Tax Credit (LIHTC) and Other Tax
Credit Program Guidance
14.2 Affordable Housing Underwriting and Program
Guidance In Other Parts of the MAP Guide
Chapter Index / Section Index
Document page 458
MAP Guide
Section Number
Content
Section 2.7
Identities of Interest are permitted between lenders and equity syndicators,
investors or bridge loan lenders, in limited circumstances.
Tax Credit projects usually go “direct-to-firm”, but if two stage processing is
used, no pre-application fees are charged for LIHTC or other affordable projects.
Sections 3.2 &
4.2.B.
Section 3.3
Sections 3.4, 3.5, &
3.7.
Section 3.7
Section 4.1
Section 5.8
Section 7.5.A
Section 7.5
Section 7.9.I.
Section 7.14
Section 7.16
Section 7.17
Section 8.3
Section 8.4
Section 8.7 & 8.8
Loan sizing ratios under 221(d)(4) are provided, and these apply to Tax Credit
projects underwritten for that program, unless adjusted for the FHA Housing
Tax Credit Pilot Program in separate guidance.
Loan sizing ratios under 220, 223 and 231 are provided, and these apply to Tax
Credit projects underwritten for each program.
Loan sizing ratios under 223(f) are provided, and these apply to Tax Credit
projects underwritten for that program, unless adjusted for the FHA Housing
Tax Credit Pilot Program in separate guidance available as of this writing.
One stage application processing is permitted for all Tax Credit projects under
all Sections of the Act.
Streamlined processing (including delayed submission of final plans) is
permitted for Tax Credit projects, assuming certain conditions are met.
No market study, other than that which would be provided in the appraisal, is
required for projects with 90% or more project based rental assistance.
Requirements for market studies, applicable to all SOAs if required.
Estimating the land value of Tax Credit projects.
Calculating operating deficits (for all Tax Credit projects.)
Recognizing tax abatements in the underwriting, and waivers of certain
underwriting requirements for Tax Credit projects.
Valuation of Tax Credit and other affordable properties.
Identifying the principals in an LLC, LP or non-profit for purposes of mortgage
credit review and limited review of tax credit equity syndicators and passive
investors.
Financial requirements of sponsors of affordable projects.
Determining the mortgage amount and cash requirements; no escrowing of tax
credit equity during construction; and Firm Commitment special conditions for
deferred equity installments.
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Section 8.9
Section 8.7
Section 8.12
Section 8.8 and 8.13
Section 8.14
Section 13.4
14.3
Chapter 14
Low Income Housing Tax Credit (LIHTC) and Other Tax
Credit Program Guidance
14.3
Historic and New Markets Tax Credits
Document page 459
Chapter Index / Section Index
Requirements for secondary financing from governmental lenders and for bridge
loans used to fund equity during the construction period; use of HUD’s form of
Subordination Agreement instead of Note Rider.
Requirements for grants and loans, and for various tax credits including the
LIHTC, from governmental sources.
Evaluating mortgage credit of non-profit sponsors.
Cash requirements for Tax Credit projects, including working capital and
operating deficit escrows.
Requirements for tax exempt bond financing.
No cost certification required for tax credit project loans under 80% of cost.
Historic and New Markets Tax Credits
Generally the LIHTC-related provisions of the Guide that are applicable to all LIHTC projects (within and
outside of the Pilot Program) are also applicable to projects using Historic and New Markets tax credit
equity. However these other tax credit programs are not housing based: New Markets Tax Credits are
administered by the Community Development Financial Institutions Fund, or “CDFI” Fund, (a program within the
U.S. Department of the Treasury), while the Historic Tax Credits are administered by the National Park
Service, the Internal Revenue Service, and the State Historic Preservation Offices. These programs are
only occasionally used in FHA-insured projects, so no further policy is provided in this chapter. However,
to the extent it is legally permissible and consistent with FHA’s mortgage credit and underwriting
standards, other tax credit programs can be used in a manner similar to that described below for LIHTC
projects. Further detail is provided in Chapter 16.
14.4
Subsidy Layering Review
Subsidy Layering Review requirements have been eliminated for LIHTC projects using FHA-insured
loans but no other sources of Federal subsidy. Thus, most of HUD’s mortgage insurance transactions are
exempt from the formal subsidy layering review. The lender and underwriter must always review the
Sources and Uses statements for both mortgageable and non-mortgageable funds however, to ensure that
costs are not being funded twice and that all costs funded from mortgage proceeds are appropriate and
necessary to complete the transaction.
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Chapter 14
Low Income Housing Tax Credit (LIHTC) and Other Tax
Credit Program Guidance
14.5
Evidence of Tax Credit or Private Activity Bond
Cap Allocations
Document page 460
Chapter Index / Section Index
In addition to the analysis of the Sources and Uses in the FHA loan underwriting, other public funds
combined with the FHA mortgage in a Tax Credit project may require a formal Subsidy Layering Review.
These public funds might include HOME and other Federal Loans, secondary financing provided from
state or local sources, or capitalized debt supported by above-market, budget based Section 8 rents. If
those funds require a Subsidy Layering Review, either a state agency, another public source or HUD will
perform the review based on the FHA MAP Lender’s analysis. Criterion 11 on the Supplement to Project
Analysis (HUD Form 92264-A) is not required. It may be used as an optional worksheet.
14.5
Evidence of Tax Credit or Private Activity Bond Cap Allocations
The Firm Application for any LIHTC project should include evidence of 1) an LIHTC award in the form
of a 9% State Agency Allocation or in the case of 4% Tax Credits, an allocation of private activity bond
cap 4, or 2) in the case of Historic Credits or New Market Credits, an equivalent form of verification from
the appropriate agency. However, LIHTC allocation timing varies by state and in some cases FHA
applications must be submitted before final allocations of tax credits can be secured. Accordingly other
evidence is allowable, for example state agency bond cap allocators’ assurances and written procedures
stating that bond cap remains available for the period in question, that an application has been submitted
for the project in question, that allocations are obtainable in the time available, etc., in the case of 4%
LIHTC allocations.
14.6
Single Underwriter and Technical Reviews
The “single underwriter model”, which gives the HUD Underwriter responsibility and discretion to
determine what level of technical review is needed in several elements of the underwriting, has been
implemented for all MAP loans. The assigned underwriter has discretion to obtain full or partial
technical reviews, or to waive technical reviews, other than Environmental site visits and completion and
certification of the Environmental Review in HUD HEROS Form 4128.
4
Note that in some states this general rule is not workable, because, for example, states may require evidence of FHA loan
commitments before the allocation can be made, or other timing difficulties arise. In such cases final allocations will not be
required until later in the process.
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14.7
Chapter 14
Low Income Housing Tax Credit (LIHTC) and Other Tax
Credit Program Guidance
Document page 461
Chapter Index / Section Index
Treatment of HAP Contract Renewals for Section 8 Assisted Tax
Credit Projects
Rental assistance for LIHTC projects with Project Based Section 8 Rental Assistance (“Assisted
Projects”) should take the form of a 20-year, Project Based Rental Assistance Section 8 Housing
Assistance Payment (HAP) contract or a 15-year Project Based Voucher contract.
Rent Comparability Studies (“RCSs”) form the basis of and must be completed in advance of any loan
application, because they provide justification for rent increases and are a requirement of the HAP
Contract Renewal Request. The lender must review the RCS as part of the underwriting process and take
its conclusions into account when reviewing the MAP appraisal. If the borrower commissions the RCS,
the same firm cannot do the appraisal. However if the lender commissions the RCS, the same firm can
also do the appraisal. The lender is expected to underwrite the loan using the rents from the RCS to
develop income and expense estimates (and/or the Section 8 budget prepared by the borrower in the case
of budget based rents) and to address any inconsistencies carefully in the lender’s narrative. The HUD
Underwriter will review the Section 8 HAP contract request, RCS and lender’s underwriting narrative to
verify that the rents requested by the borrower in the HAP contract renewal request are supported by the
RCS, and that the lender’s underwriting is in line with both the RCS and the contract renewal request. At
the HUD Underwriter’s discretion the HUD appraiser may be asked to review an RCS to determine its
reasonableness. However if the Performance Based Contract Administrator’s 5 (“PBCA”) appraiser has
not undertaken a detailed review of the RCS, the HUD appraiser must also review the RCS to determine
reasonableness using Guidelines in Chapter 9 of the “Section 8 Renewal Policy”.
Close coordination among the assigned HUD Underwriter, the field office’s Office of Asset Management
and Portfolio Oversight (OAMPO) representative assigned to the project, and if necessary, HUD HQS’
OAMPO staff is essential to ensure that a) the Section 8 HAP contract renewal request and rent increase,
if applicable, are approved in a timely fashion, b) a prepayment approval is obtained if needed, and c) any
other waivers are processed and approved in a timely fashion.
Section 8 HAP Renewal Requests and Rent Adjustment Requests must be delivered to the Performance
Based Contract Administrator (PBCA) at least 60 days prior to the submission of the LIHTC Firm
Commitment application, and 120 days in advance is preferable. However, the Rent Comparability Study,
or “RCS” rents and the appraiser’s rents must be determined within 180 days of the issuance of the Firm
5
The PBCA is an agency hired to assist HUD/OAMPO in the administration of Section 8 contracts.
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Chapter 14
Low Income Housing Tax Credit (LIHTC) and Other Tax
Credit Program Guidance
14.7 Treatment of HAP Contract Renewals for Section 8
Assisted Tax Credit Projects
Chapter Index / Section Index
Document page 462
Commitment, or those rents must be updated according to Part 7.6.B. Thus the owner and lender must
manage the timing accordingly. The rents, expenses and debt service figures used in the lender’s
underwriting must be consistent with those in the Section 8 contract renewal request. Lenders should
assist borrowers to ensure that requested (and subsequently approved) rents are consistent with the
underwritten rents. Similarly, lenders’ requests for prepayment of an FHA insured loan should be
submitted to headquarters well before submission of the Firm Application package to the HUD field
office. The PBCA working under the direction of OAMPO prepares and signs the new contract and an
attached cover letter for delivery to the owner.
Section 8 subsidized Pilot Program projects require owners to execute a 20 year HAP contract (except for
Mark-to-Market (M2M) projects that received exception rents). RAD projects are eligible for the Pilot as
long as at least 90% of their units are Section 8 assisted, and they have new 15-year Project Based
Voucher contracts. In many cases this will require HUD to authorize the Owner to terminate the existing
HAP contract for the purposes of executing a new 20 year HAP contract. If the project is operating under
a multi-year term contract, the Owner and HUD must, by mutual agreement, terminate the existing HAP
contract and execute a Renewal Contract with a new 20 year term, subject to the policy at the time and the
availability of appropriations. The Owner must also execute an Exhibit to the Section 8 HAP contract,
agreeing to renew the HAP contract again at the end of the new 20-year term, for at least the number of
years remaining on the contract in place at the time of the early termination. This requirement is
contingent on the availability of funding with such terms at the time of the renewal. The Preservation
Exhibit must also be executed.
An exception to the HAP Renewal Request requirement may be made if the borrower has renewed the
project’s contract for a 20 year term within the 12 month period prior to the anticipated closing date of the
new FHA-insured loan. In such cases the lender is to submit a copy of the borrower’s HAP Contract
Renewal Request that lists any requested rent adjustment (which must be supported by either a Rent
Comparability Study, a budget, or both, in accordance with OAMPO requirements as stated in the Section
8 Renewal Policy Guidebook, Effective 11/5/15).
If the borrower requests a market-based rent increase on a substantial rehabilitation project at “post rehab”
market rent levels to support a new 221(d)(4) insured loan at initial closing, a Section 8 escrow will be
required to fund the difference between the existing rents and the post-rehabilitation rents during the
construction period. Lenders should include this escrow in their underwriting. Alternatively under the
Section 223(f) program a waiver of the prohibition against post rehab rents during construction can be
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Chapter 14
Low Income Housing Tax Credit (LIHTC) and Other Tax
Credit Program Guidance
14.8
Application/Submission Requirements
Chapter Index / Section Index
Document page 463
obtained. Borrowers and their lenders should refer to the Section 8 Renewal Policy for details on postrehabilitation rents.
A copy of the HAP Contract Renewal Request must be included in the LIHTC project mortgage insurance
application. It demonstrates that the rents requested by the borrower match the rents used in the
underwriting submitted by the lender, and it serves as evidence that the borrower has in fact submitted the
request for the contract renewal/rent increase. If the borrower is submitting a budget-based rent request,
the lender must coordinate with the borrower to determine a preliminary debt service figure for the new
loan that the borrower will include in the proposed budget to submit to HUD and the PBCA. The final
debt service figure is subject to change during the final underwriting process, so this may have to be
amended on the HAP contract request later. The income, expenses and debt service figures listed on the
borrower’s request must match the figures in the lender’s underwriting. Specific forms and
documentation for inclusion in the Firm Approval Application include the following:
A. Project Rent Comparability Study prepared for the Section 8 contract renewal must be submitted with
the LIHTC Firm Approval Application.
B. MAP-compliant appraisal and HUD forms 92264, 92273 and 92274 are required. However, appraiser
may opt to use the 92273 used in the Rent Comparability Study or another format and may use Form
HUD 92274 or an alternative format acceptable to the lender and the HUD Underwriter for expenses.
C. The information supplied in the RCS and required by OAMPO for the rent increase/contract renewal
request is the same information required for the Firm Application on forms 92273 and 92274, so there
is no need for the lender or the lender’s appraiser to recreate the information on a form for the
application. The HUD Underwriter may also consult iREMS for historic rental income and project
expense information if this information is helpful to verify the income and expenses used in the
underwriting. HUD’s Single Underwriter will perform a desk review of the appraisal and the lender’s
appraisal analysis for Assisted Housing projects: This review is delegated to the project’s approved
MAP lender.
Note regarding RAD/FHA/LIHTC Projects: HUD has issued separate guidance for Rental Assistance
Demonstration projects with regard to the underwriting of RAD transactions with FHA-insured loans and
LIHTC.
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14.8
Chapter 14
Low Income Housing Tax Credit (LIHTC) and Other Tax
Credit Program Guidance
14.8
Application/Submission Requirements
Document page 464
Chapter Index / Section Index
Application/Submission Requirements
The following describes application requirements for all Tax Credit Projects, that differ from those
described in other sections of the MAP Guide for projects without Tax Credits. Other application
documents specific to the Pilot Program are listed in a separate Tax Credit Project Application Exhibits
Checklist.
A. Lender’s Application Form. The Tax Credit Program Pilot Lenders’ Narrative template can be used
for all Tax Credit Projects and is available on HUD’s Tax Credit Pilot website at:
http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/map/maphome/taxcredit.
B. Data Submission. A tax credit version of the “Wheelbarrow” or similar document set up to provide
specialized information with respect to sources and uses of funds, draw schedules and other matters
essential to analysis of LIHTC projects, must be submitted for all Tax Credit projects in place of the
standard Wheelbarrow. It is a substitute for Forms 2264a and 2264, and it is available on HUD’s Tax
Credit
Pilot
website
at:
http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/map/maphome/taxcredit.
This
Wheelbarrow may be used for all Tax Credit projects.
Other standard documents will be those used for a given project’s SOA program.
14.9
Architecture and Engineering
A. Tax Credit refinancing and substantial rehab projects must conform to all current CNA requirements.
B. The ALTA Survey submission may be waived for Tax Credit transactions involving the refinance of a
project with an existing FHA-insured mortgage, if the new FHA borrower submits a statement
reviewed and approved by the MAP lender and certifying that there have been no material changes or
additions to the structure or property boundaries since the closing of the original loan. Accordingly
HUD may accept an existing survey for such projects rather than requiring a new survey document.
C. 100% Complete/Final Plans and Specs may be delivered after Firm Commitment but no later than 30
days prior to closing, so long as sufficient time is allowed for review prior to closing. If the
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Low Income Housing Tax Credit (LIHTC) and Other Tax
Credit Program Guidance
14.10 Mortgage Credit Review for Tax Credit Projects
Document page 465
Chapter Index / Section Index
documents evidence a cost increase of 5% or more compared to prior plans and specs, further review
will be required as described in Part 5.6. D. and E.
D. Other Documents: A Specialized Checklist for Application Submissions on Tax Credit Projects is
available at the following link:
http://portal.hud.gov/hudportal/documents/huddoc?id=Appendix_D_Checklist.pdf
14.10
Mortgage Credit Review for Tax Credit Projects
A. Non-profit Sponsors’ Mortgage Credit Requirements. Non-profit board members are excluded from
the Previous Participation Review submission requirements. Only officers of the non-profit and board
members who serve as officers of the board (e.g., the President or Chair of the Board, the Vice
President, Treasurer and Secretary) are required to prepare and submit the Previous Participation
Review. However other LIHTC project principals must meet standard requirements.
B. Passive Investors’ and Syndicators’ Mortgage Credit Requirements. Investors often want notice and
cure rights, and the right to bring in a “Special Limited Partner” quickly in case of default by or other
failure of the initial General Partner. Provision of Notice to the Investor by HUD and pre-approval of
a Special Limited Partner to step in and act as a General Partner for a limited period of time, under
specific conditions, can be achieved through a “Rider to the Security Agreement for LIHTC Properties”
available at http://portal.hud.gov/hudportal/documents/huddoc?id=Security_Instrument_Rider.pdf. In
addition, instructions for the use of this Rider are provided at
http://portal.hud.gov/hudportal/documents/huddoc?id=Pre-appr_Process_Instru.pdf.
When passive partners are replaced however, a modified Transfer of Physical Assets (“TPA”) may be
required.
HUD’s previous “LLC1 Form” has been replaced with the “Identification and Certification of Eligible
Limited Liability Investor Entities”, or “Passive Investor Certification”, to better accommodate
passive partners with limited liability. This form is used in place of the 2530 for such entities. The
Passive Investor Certification may only be used by entities that are acting exclusively as passive
investors, however, and it is not a substitute for any financial information that HUD may require to vet
an investor’s financial capacity. The form is available at the address below:
http://portal.hud.gov/hudportal/documents/huddoc?id=Passive_Invest_Id_Certifi.pdf
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Chapter 14
Low Income Housing Tax Credit (LIHTC) and Other Tax
Credit Program Guidance
14.11 Identities of Interest in Tax Credit Transactions
Document page 466
Chapter Index / Section Index
Both syndicators and investors may use the Passive Investor Certification in lieu of the 2530 or other
Previous Participation Review submission. However, if a syndicator is creating a GP or LLC
Managing Member or is otherwise related to the GP or Managing Member, the Previous Participation
Review (currently, the Form - 2530 or APPS submission) will be required. Passive partners are
generally described as participants who do not exercise day to day control. Typically, passive investors
retain authority and responsibility only for occasional decisions such as approval of a change in
management agent, replacement of the GP in certain circumstances, and approval of capital
improvement costs over a given dollar amount. These activities are not considered by HUD to be
active day-to-day management, and accordingly upper tier investors with involvement limited to these
or similar functions are not subject to Previous Participation Review clearance.
C. Requirements for General Contractors: For Section 223(f) Tax Credit projects with Level 2 or Level 3
repairs, the General Contractor will not be treated as a principal unless it also has an ownership
interest in the project. HUD will rely on other information with respect to the GC’s experience
described in a resume that must include 1) a discussion of relevant multifamily experience, 2) a
schedule of jobs in progress, 3) the Form 2328, 4) the IOI certification, and 5) HUD’s response to
processing of the four questions on the 2013-SUPP Form. HUD or the lender may determine that
greater detail is warranted, for example, in the case of a relatively inexperienced or undercapitalized
borrower and/or a high cost rehab.
14.11
Identities of Interest in Tax Credit Transactions
A. Identity of Interest between the Lender and Syndicator. FHA allows an exception to its prohibition on
identities of interest in certain cases, allowing MAP Lenders to retain interests of up to 25% in the tax
credit equity of projects for which they are the FHA lender, with no limit on the number of projects.
Supervised or publicly held MAP Lenders may request prior approval to hold up to 100% of the
ownership in LIHTC limited partnerships or equivalent investor members in an LLC. See Section 2.7
for additional details.
B. IOI Transfers for Non-Profits. Non-profit owners of currently insured or HUD-held properties may
syndicate LIHTC properties and form new partnerships subject to HUD’s Transfer of Physical Asset
(“TPA”) policies. (See Housing Notice 2011-31.)
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14.12
Chapter 14
Low Income Housing Tax Credit (LIHTC) and Other Tax
Credit Program Guidance
14.12 Calculation of Mortgage Amounts for Tax Credit
Projects
Chapter Index / Section Index
Document page 467
Calculation of Mortgage Amounts for Tax Credit Projects
A. Section 223(f) applications for Tax Credit projects that involve transfers of ownership to identity of
interest purchasers may be treated either as acquisitions or refinancing transactions for purposes of
sizing the mortgage: Lenders may use either Criterion 7 or 10 on the HUD form 92264A.
B. Underwriting Tax Abatements. If a purchase or refinancing transaction includes new or previously
funded tax credit equity, the underwritten NOI may recognize tax abatements even if they run with the
sponsorship (mortgagor) entity and not with the land. Procedures in Section 7.16 must be followed.
C. Substantial Rehab Contingency. Generally, unspent contingency funds in an FHA-Insured loan
project must go into a Reserve for Replacement Account (“R4R”) or pay down the mortgage. One
exception to this rule applies to Low Income Housing Tax Credit properties with affordability
restrictions that meet HUD’s definition of “Affordable Housing” and obtain FHA mortgages that are
not sized with the use of the cost criterion. In such cases, HUD allows contingency funds included in
the FHA mortgageable cost basis but not needed for repairs, appropriate betterments, or deposits to
R4R, to be used to pay a developer’s fee (deferred or otherwise) or any other reasonable project
related reimbursement item as defined by HUD. If contingency funds will not be used to reduce the
mortgage, they should be placed into an escrow. Such funds should not be released until the later of
Final Endorsement or 6 months of sustaining (breakeven) occupancy. Release of funds requires
Satellite/Regional Office approval of project repairs, performance, and demonstrated compliance with
all terms of the Tax Credit Program or other requirements of the applicable business agreements.
14.13
Developer Fees and GC Profit
A. Developer fees will be treated as mortgageable costs so long as they are 1) in amounts approved by the
project’s LIHTC allocation agency and 2) scheduled for payment in amounts and at times agreed upon
with the syndicator.
For FHA-insured loans limited to 80% of value, the loan to cost ratio provides a safe harbor and limits
risk, so proceeds may be used for any purpose including payment of development fees higher than
those described above. However when LTV is increased to a percentage of cost to finance under the
Criterion 10 limits (90% or more for Section 8 LIHTC projects and 87.5% for unassisted LIHTC
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Low Income Housing Tax Credit (LIHTC) and Other Tax
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14.13 Developer Fees and GC Profit
Chapter Index / Section Index
Document page 468
projects), payment of developer fees with FHA mortgage proceeds is limited to the amount approved
as described above to the extent supported by the mortgage and consistent with all other allocating
agency rules and the partnership or operating agreement. Developer fees cannot be claimed for
projects for which BSPRA or SPRA is claimed, regardless of whether the developer fee is treated as a
mortgageable cost or not. Developer Fees for different project types and loan programs are addressed
in greater detail in Appendices 3.B.1. and 2.
B. Neither BSPRA nor SPRA may be claimed when developers’ fees are included in the project budget,
whether the developer fees are treated as mortgageable or not.
C. Relationship of Developer Fee to General Contractor Profit and Determination of Fees in Cases with
an IOI Relationship between Contractor and Owner/Developer. An IOI between the GC and the owner
is allowed and does not require a waiver, but it must be disclosed in the application and may affect the
fee structure. No blanket restriction has been imposed on the amount of General Contractor Profit,
though it must be reasonable based on the market and the scope of work. Claiming both a GC profit
and a developer fee when there is an IOI relationship between the two can result in excessive
compensation however. HUD generally relies on the policies of the State tax credit allocation
agencies, which often scale fees down to lower limits when a single party or two related parties are
receiving both the Developer Fee and the GC Profit. The Lenders’ and HUD’s Underwriters will
evaluate the fees and profits for each project and reduce them if they are determined to be excessive,
considering the scope of the project and the amount of the proposed fees. Projects with excessive fees
may not be approved.
D. Structuring of Deferred Developer Fee as Secondary Debt. Deferred developer fees may be treated as
either secondary debt or equity. If treated as debt, the obligation must meet all private secondary debt
requirements described in Part 14.14 below. Alternatively if the deferred developer fee is described in
the partnership or operating agreement as an agreement between upper tier members, such that it is an
obligation of one or more of the upper tier principals and will not encumber the project, it will be
considered equity, not debt. Accordingly it need not meet the private secondary debt requirements.
E. Payoff of Deferred Developer Fees in a Subsequent Transaction. When the FHA mortgage serves as a
take-out source on a recently completed new construction or rehabilitation project, a deferred
developer fee note from the most recent transaction (i.e. the construction closing) will be treated as
originally structured. If the note is an obligation of one or more of the principals as described above,
the deferred fee will be treated as equity, the cost of paying it off would not be mortgageable and the
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Chapter 14
Low Income Housing Tax Credit (LIHTC) and Other Tax
Credit Program Guidance
14.14 Structuring of Secondary Debt in Tax Credit
Transactions
Chapter Index / Section Index
Document page 469
liability would have to be satisfied so as not to remain in place after the FHA loan closing.
Alternatively if the note was structured as a debt of the ownership entity or project it may be
recognized and paid off in the same manner as other debt, or assumed by the purchaser to remain in
place after the refinancing. Because developer fees must be paid off for tax reasons within ten to
twelve years in order to be treated as part of a project’s eligible basis for Tax Credit purposes, the
notes are not likely to be problematic in later refinancings such as those often done after year 15.
Generally a deferred developer fee note will not be included in mortgageable costs basis, unless it is
paid off through cash out in an 80% LTV transaction.
14.14
Structuring of Secondary Debt in Tax Credit Transactions
A. LTV Ratio and Private Secondary Debt. For transactions that do not have Low Income Housing Tax
Credits, Section 223(f) limits the combination of FHA insured and secondary financing to a loan to
value limit of 92.5% (except when the debt source is a public entity). For tax credit (regardless of
type) projects however, the debt limit can restrict property basis and tax credit amounts unnecessarily.
Accordingly, HUD will not impose a loan to value limit on this secondary financing, regardless of the
source. This means that in some cases debt will exceed value. However all such secondary debt is
subject to the following conditions:
1) Payments on all secondary debt are restricted to 75% or less of the annual surplus cash, or from
the proceeds of a sale or refinancing of the property. (See 24 CFR 200.85(b).) This limit applies
cumulatively to all secondary debt, private and public, to ensure that at least 25% of the surplus
cash remains as an incentive to the owner. Owners may make additional payments on the debt
out of their remaining 25% of cash flow, or from other sources.
2) The total combined private secondary debt does not exceed the limit of 100% of total project
costs as confirmed by the HUD Underwriter’s analysis of a comprehensive Source and Uses of
Funds Statement. (Public secondary debt is not included in this calculation.);
3) The maturity date of the secondary debt must be coterminous with, or later than that of the first
mortgage.
4) The secondary debt can reasonably be expected to be paid off over its term with 75% of the
project’s surplus cash;
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Low Income Housing Tax Credit (LIHTC) and Other Tax
Credit Program Guidance
14.15 Tax Credit Equity Pay-In Schedule
Document page 470
Chapter Index / Section Index
5) The debt is documented in HUD’s form of Surplus Cash Note (92223M) or subsequent version;
or simple interest. However the lender should provide a thorough analysis demonstrating that
project cash flow will be sufficient to avoid accruals of interest that would undermine the long
term financial and physical integrity of the project, and all other risks have been adequately
mitigated; and
6) Private debt of up to 100% of Total Project Costs may be secured with the project but it must be
subject to automatic re-subordination in any refinancing of the first mortgage.
B. Bridge Loans. Temporary bridge loans are treated differently than other secondary financing, and are
described in detail below in Part 14.16.
C. Publicly Funded Loans or Public Debt. Loans funded with HOME Funds or other federal, state or
local public sources, as well as those funded by quasi-public agency programs such as the Federal
Home Loan Bank’s Affordable Housing Program (AHP), may be granted or lent directly to HUD’s
borrower, or to the GP or sponsor of the borrower, who will then loan it to HUD’s borrower. All such
sources will be treated as public secondary financing sources, and as such need not be included in the
calculation of the 100% of total project cost limit applied to private secondary debt. However, none of
these sources may be substituted for Tax Credit Equity required by the pay-in schedule provided
below and all remain subject to the 75% cap on payments from surplus cash.
D. Deferred Developer Fees. Deferred developer fees are deducted from equity prior to the calculation of
the required equity pay-in schedule. These fees may be converted to notes secured by the property and
paid from surplus cash, but then they must be included as debt in the 100% of total project cost limit
calculation. Deferred developer fees may also be treated as equity, in which case they are not secured
with the property and may be paid only through surplus cash. Further detail on developer fees in Tax
Credit Projects is included in Section 14.13.
14.15
Tax Credit Equity Pay-In Schedule
FHA requires minimum Tax Credit equity contributions according to the following pay-in schedule for all
LIHTC transactions 6 Filled in with actual total equity and net-equity amounts, the schedule is to be added
6
This schedule does not apply to equity derived from New Market or Historic tax credits.
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Low Income Housing Tax Credit (LIHTC) and Other Tax
Credit Program Guidance
14.15 Tax Credit Equity Pay-In Schedule
Document page 471
Chapter Index / Section Index
as a special condition to the Firm Commitment for all Tax Credit Projects and used as a method of
checking proposed disbursement schedules. Waivers of the first 20% equity pay-in will not be considered
and neither bridge loans nor other sources, such as publicly funded loans or grants may be used to fund the
first, 20% equity pay-in amount. Waivers of subsequent payment amounts will generally not be approved
either.
Benchmarks for Equity Installments
Minimum Equity
Installment 78
On Or Before Closing (223(f)) or Initial Endorsement
(221(d)(4))
At 65% Completion of Repairs (223(f)) or Construction
Completion (221(d)(4)
At 100% Completion of Repairs (223(f)) or Final
Endorsement (221(d)(4)
20% of Total Equity
37.5% of Net Equity
62.5% of Net Equity
Equity investors may fund all or part of the required equity pay-ins defined above, with the exception of
the first 20% payment, with equity bridge loans that meet the requirements described in Section 14.16
below. However, investors may not substitute any grant or loan funds, other than funds in the form of
Equity Bridge Loans as described in Part 14.16 below, for the equity payments described in the chart
above.
A. Definition of “Net Equity”. The term “Net Equity” is equal to Total Equity less 1) Deferred Developer
Fees that are documented in a note and paid from project surplus cash, not equity, 2) “Delayed”
Developer Fees for amounts due after the completion of repairs or construction, but not included in the
Deferred Developer Fee Note and 3) predetermined reserve amounts to be held by the investor for
project uses after the time of the final pay in noted in the schedule above. Reserves allowed for this
calculation may include only amounts that are required in the project’s Partnership Agreement or LLC
Operating Agreement. These include Lease Up Fees and Escrows, Operating and Debt Service
Reserves, Section 8 HAP Contract Transition Reserves, Replacement Reserves, and State Agency
Administrative Fees or Escrows. When calculating the pay-in amounts, owners must first reduce the
7
Additional equity is acceptable at each benchmark date shown, as well as at other interim dates at the investors’ discretion.
However the amounts shown in this column are the minimum amounts required by any given benchmark date listed in the
chart.
8
With the exception of the first equity payment, which is calculated as a percentage of Total Equity, all percentages used in
this column represent percentages of Net Equity. This includes equity going into the project as tax credit proceeds for both
non-mortgageable and mortgageable costs. The Deferred Developer Fee must be documented in a note, and paid from the
project’s surplus cash, not equity.
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Chapter Index / Section Index
Document page 472
total amount of equity committed to the project by the amount of these costs, and apply the payment
percentages above to the remaining or “Net” Equity. No other costs may be deferred. This calculation,
specifying each applicable use, must be provided to HUD in the FHA insurance application.
B. An example of the calculation of the Net Equity amount, and the resultant pay-in schedule, is provided
below:
Total Equity or Gross Proceeds = ...................................................................................$7,500,000
Net Equity = Total Equity Minus Allowed Reductions and Equity Pay In #1
Less Payment #1 (20% of Total Equity Above) ....................................................... - $1,500,000
Remaining Equity (80% of Total Equity Above) ........................................................ = $6,000,000
Less: Allowed Reductions
Not to Exceed 25% of Total Equity (25% x $7,500,000) = ..................................... - $1,875,000
Minimum Net Equity = $7,500,000-$1,500,000-$1,875,000 = ....................................... $4,125,000
Sample Owner’s Proposed Reductions:
Delayed Developer Fee .......................................................................................... $500,000
Deferred Developer Fee ......................................................................................... $300,000
Lease Up Fees and Escrows.................................................................................. $175,000
Operating Reserves ................................................................................................ $145,000
Debt Service Reserves ........................................................................................... $200,000
Section 8 HAP Contract Transition Reserves ........................................................ $235,000
Replacement Reserves ........................................................................................... $300,000
State Agency Administrative Fees or Escrows ....................................................... $45,000
Total .....................................................................................................................$1,900,000
This total would be disallowed, as the $1.9 million exceeds the 25% of total equity ($1.875 million)
allowed. Accordingly it is reduced by $25,000 in the following calculations. Net Equity is the Balance,
after Total Equity is reduced by Payment #1, and by the Allowed Reductions of $1,875,000, or
$4,125,000. This number would be adjusted if the owner were to claim less than the maximum Allowed
Reductions.
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Low Income Housing Tax Credit (LIHTC) and Other Tax
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14.16 Equity Bridge Loans (“EBLs”) in Tax Credit
Projects
Document page 473
Chapter Index / Section Index
Payment
Description
Formula
Amount
Equity Pay I #1
20% of Total Equity
20% x 7,500,000 =
$1,500,000
Equity Pay In #2
37.5% of Net Equity
($4,125,000) (7,500,0001,500,000-1,875,000) =
37.5% x $4,125,000 $1,546,875
Equity Pay In #3
62.5% of Net Equity
($4,125,000)
62.5% x $4,125,000 $2,578,125
14.16
Equity Bridge Loans (“EBLs”) in Tax Credit Projects
Bridge loans may be used by Tax Credit investors to defer the pay-in of equity during a project’s
development and stabilization phases, thereby increasing the return on equity. The bridge loan may be
the obligation of one or more of the investors or other upper tier partners to the ownership entity (i.e. the
limited or general partners), or an obligation of the project ownership entity/single-asset mortgagor itself.
In addition the following conditions must be met:
A. EBLs may not be secured by a lien on the real estate or on any other mortgaged property as defined in
the Security Instrument, although they may be secured with a pledge of Tax Credits and/or of limited
partners’ or investor members’ interests in the project’s ownership entity;
B. EBLs must be non-recourse to the Borrower, and the bridge lender shall have no claim even in an
event of default against the Borrower, the Project, FHA mortgage loan proceeds, or any reserve or
deposit made with the FHA Lender, or otherwise required by HUD;
C. In the event HUD acquires title to the Project by foreclosure or deed in lieu of foreclosure, the bridge
loan documents automatically terminate and the Borrower shall be released of all of its obligations
with respect to the EBL;
D. The obligation must be evidenced by a promissory note; and
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E. The term of the note may last through the construction or rehabilitation period but must be paid in full
no later than the following dates:
1.
In the case of EBLs provided by private, for-profit lenders, at 100% Completion of Repairs for
223(f) loans, or at Final Endorsement for 221(d)(4) loans (the time of the final equity pay-in); and
2.
In the case of EBLs provided by not-for-profit, public sector or quasi-public sector entities, no
later than ten (10) years following 100% Completion of Repairs for 223(f) loans, or Final
Endorsement for 221(d)(4) loans.
F. The borrower must provide evidence to the lender’s satisfaction that the bridge loan has been paid in
full at the times noted above; and
G. At Firm Application, or as soon as the need for a bridge loan is known, the lender must submit a term
sheet describing the key terms of the bridge loan, as well as a certification that a) the loan will be
secured only by a pledge of partnership interests or tax credit benefits and not by the project, and b)
that the bridge lender will have no claim against the mortgaged property, mortgage proceeds, any
reserves or deposits, or against the rents or other income from the property for repayment of the bridge
loan.
H. Bridge loans for other purposes, (i.e. that are not used to advance equity in tax credit projects) are
described in Chapter 8.
14.17
Syndicator and Investor Fees Paid from Operations
Tax Credit projects often involve annual asset management related fees paid to the syndicator or an
investor representative. HUD’s Office of Asset Management and Portfolio Oversight allows usual and
customary fees and expenses for operating a Tax Credit project, including payment of a syndicators’
and/or investor’s asset management fee, state allocation agency compliance and asset monitoring fees, and
mandatory interest payments of up to one percent on subordinate debt provided by a government lender to
be paid from the operating budget. Deferred developer fees, along with interest accrued at the Applicable
Federal Rate for up to 12 years, may be included as an operating budget line item but may only be paid
from surplus cash after the FHA-required reserves and first mortgage debt service are met. These fees are
identified in the distributions “waterfall” of payments in the project’s partnership agreement (or operating
agreement, in the case of a Limited Liability Company.) If the expenses described above are included in
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Document page 475
the operating budget however, the loan must be sized accordingly by the lender, and the chosen treatment
of the expenses must be documented in the closing documents. Fees paid with surplus cash, however,
should not be included in the operating budget. HUD generally requires that at least 25% of surplus cash
remains available as an owner incentive, though the remaining 75% may be obligated to payment of
secondary debt.
Mark to Market Transactions: Owners are allowed to receive an Incentive Performance Fee (IPF), and this
is paid before the 25%/75% split is calculated. Thus the IPF is paid first, and may be realized in addition
to the owner’s 25% of surplus cash. Mark to Market also obligates the owner to use the full 75% of
surplus cash to pay down the program’s secondary M2M loans. Accordingly in M2M transactions, the
payment of syndicators’ and investors’ fees must be limited to the 25% that is not committed for loan
repayment.
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Chapter 14
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14.18 Vacancy Rates
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Document page 476
Vacancy Rates
Vacancy rates used for loan sizing purposes (and generally as a guide for appraisers) are herein revised for
all “Affordable” projects, to reflect differences in project types, as follows.
Minimum
Vacancy
Rate
Property Type
3%
•
•
•
Properties meeting at least the minimum LIHTC set-aside requirements (20% of the
units set aside for tenants earning no more that 50% of median income, or 40%
earning no more than 60%) and attainable tax credit rents at least 10% below
comparable unit market rents (a 10% discount to market.)
•
Properties in which 100% of the units are LIHTC restricted, without a 10% discount to
market; or
Properties in which more than 20% of the units are Market Rate and the remaining
units are LIHTC restricted.
5%
7%
•
14.19
HUD-assisted properties with Section 8 HAP contracts covering 90% or more of the
units; or
In-place rehabs with 90% or greater occupancy for at least 6 months prior to the start
of the rehab, 90% or more of the units LIHTC-restricted, and attainable tax credit
rents at least 10% below comparable unit market rents (a 10% discount to market.).
Other Matters
A. The market study, appraisal and underwriting for all Tax Credit projects must address the relationship
between the Tax Credit ceiling rents, the attainable rents, any subsidy contract rents and other terms,
and true market rents. Any disparities among these rents, and their related risks, must also be
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Document page 477
addressed.
B. HERA’s Exception to the Tax Credit Program’s 10 Year Holding Period. HERA provides for an
exception to the LIHTC’s ten year holding period requirement for certain federally assisted buildings,
specifically those that are 221(d) or 236-insured. Because the HERA language refers to the two
specific programs noted above as well as to “…any other program administered by the Department of
Housing and Urban Development…” the waiver should apply to all FHA-insured tax credit projects.
HUD does not render tax advice however so owners should seek tax counsel with respect to this
interpretation.
C. Bond financed projects in New York City. Section 42 of the IRS Code provides that for projects
located in New York City, the “40-60” test (restricting 40% of the units for the use of tenants earning
no more than 60% of median income) for determining whether a project qualifies as a low-income
project, is replaced by a “25-60” test. Thus the affordability requirement is reduced from 40% to 25%
of the units to be set aside at 60% of area median income. HUD will consider this exception to the setaside on a case by case basis, when the lender’s application demonstrates that the NYC market rents
for the additional 15% unrestricted units that would otherwise have been restricted, will still provide
for significant affordability in the local market.
D. Lien Priority.
The FHA mortgage lien is required by statute to be in first position ahead of all other
financing. Restrictive covenants with no monetary obligations are not considered liens however, and
in some instances it may facilitate a transaction if affordability use restrictions other than the Tax
Credit LURA survives foreclosure and is recorded prior to the FHA mortgage. On a case-by-case
basis HUD may approve non-monetary use restrictions that run with the land and thus may be superior
in priority to HUD’s first mortgage position. When waivers are requested the Lender must
demonstrate and the HUD Underwriter must verify sufficient financial strength and strong mitigants to
offset the risk of a negative impact on the marketability of the project in the event of a foreclosure or
loan sale. Mitigants might include a low FHA loan to value or loan to cost ratio, significant amounts
of public funds, high levels of funding by the source in question, Section 8 assistance for all of the
units, and higher than minimum debt service coverage.
E. Tax Credit Regulatory Agreements. In Tax Credit projects, certain IRS Section 42 obligations must
be allowed to continue post-default. Generally, however, for the Tax Credit LURA, and/or when
public secondary financing with regulatory agreements or restrictive covenants are required, HUD
requires the use of its standardized rider to these restrictive covenants, , indicating that in case of
conflicts between a LURA or another restrictive covenant and FHA “program obligations,” FHA
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Document page 478
requirements take precedence. Neither this provision nor the use of the rider itself should be waived.
Instead, staff must identify the point of conflict and consult with OGC. Alterations of the rider that are
once approved can then be used as the template for that jurisdiction, as applicable. Typical conflicts
include differing numbers of units set aside for particular income levels, different use agreement
termination dates, etc. It is the lender’s responsibility to draw attention to potential conflicts between
FHA requirements and the LURAs or other restrictive covenants as early as possible (i.e., during
Concept Meetings) and no later than with Firm Commitment application submission. If they are not
addressed in the Firm Commitment, the lender should assume the closing will be delayed.
F. Tax Exempt Bonds/Take out by FHA Insured Permanent Debt. Tax Credit projects are often financed
with the "4%" Tax Credits allocated in conjunction with private activity bond volume cap, rather than
the "9%" Tax Credits competitively allocated by State Agencies. Taxable Ginnie Mae securities’
yields and the resulting rates on FHA multifamily loans at times can be lower than tax exempt bonds
and municipal bond-backed multifamily loan rates. Consequently, investment banks have developed
an approach that combines taxable Ginnie Mae securities with short term, tax exempt bonds and 4%
LIHTC. This structure establishes several different account funds, along with a series of cash flow
events between the various accounts upon a draw request. The tax exempt bonds are secured by cash
collateral initially provided by the FHA lender's warehouse funds (or other funding source, but not
FHA-insured loan proceeds), which in turn are reimbursed with proceeds from the sale of Ginnie Maeguaranteed securities. The tax exempt bonds are retired with the proceeds of the bond collateral
account when the project is placed into service.
This structure allows the borrower to avoid higher loan rates that exist when the loan funding source
consists exclusively of tax exempt bonds, and still take advantage of the 4% LIHTC equity. This bond
financing structure is generally acceptable to HUD, but each transaction must be reviewed by Housing
field staff and OGC field counsel for programmatic and legal sufficiency, including the review of
specific transaction documents. Accordingly, underwriters must involve their OGC counterparts early
in the process to ensure these issues are addressed early and do not constrain the transaction's
processing.
Note that FHA-insured loan proceeds shall not be used to serve as collateral for the bonds, and they
may not be paid to the bond trustee or sent to other accounts to facilitate issuance of the bonds. This is
a statutory prohibition that may not be waived, as FHA-insured loan proceeds are only permitted to
directly finance the relevant activity authorized under the applicable section of the National Housing
Act. To ensure statutory compliance regarding the use of FHA-insured loan proceeds, HUD OGC
requires lenders to sign and submit the "Lender Certification for Tax Exempt Bond and 4% Low
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Income Housing Tax Credit Transactions" for financings structured in this manner.
G. Refinancing of M2M Properties. HUD’s Office of Recapitalization, along with the field offices’
Asset management staff, are responsible for reviewing any transactions that have been through an
M2M restructuring. Those transactions require a waiver of the “due on sale…” clause and extension of
the maturity dates of all subordinate notes originated in the restructuring. Current guidance is in Notice
H 2012-10, and it explains when the field offices can process the waivers, and when HQs must do it.
In complex Tax Credit transactions requiring subordination of M2M debt, the owner or lender must
request the waiver as early as possible to avoid delays, especially in the case of Tax Credit Pilot
transactions. FHA Production staff may also be involved to ensure that the Recapitalization office’s
conclusions are consistent with the underwriting of the project.
H. Underwriting 20 year Section 8 NOI for LIHTC projects may result in the use of loans structured in
two tranches, as described in Part 7.8.H.3.
14.20
FHA Tax Credit Pilot Program Expansion
Expansion of the FHA Tax Credit Pilot Program to include new construction and substantial rehabilitation
projects is forthcoming in future guidance.
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Chapter 15
Quality Assurance Enforcement Actions
15.1
Oversight of Map Lenders
Document page 480
Chapter 15
Quality Assurance Enforcement
Actions
15.1
Oversight of Map Lenders
By permitting a MAP Lender to prepare much of the documentation for a loan submission for mortgage
insurance, HUD places confidence in the lender’s integrity and competence. HUD and MAP Lenders
have a mutual interest in ensuring consistent lender competence and compliance with the MAP Guide and
other relevant guidance and handbooks. If in the process of performing this work, the lender places HUD
at un-due risk, HUD will issue a Warning Letter or sanction the lender.
Every HUD multifamily employee plays an important role in the MAP Quality Assurance (QA) effort.
This Chapter provides QA guidance to Program Centers, Hubs, and the Office of Multifamily Production
(OMP) Headquarters, including the Office of Counterparty Risk Management (CRM). Such quality
assurance tools are: i) Warning Letters; ii) Probation; iii) Suspension; iv) Termination; v) Limited Denial
of Participation (LDP); and vi) referral to the Mortgagee Review Board or the Office of Inspector General.
An LDP is a sanction applied to participants in loan transactions other than FHA-insured lenders under
procedures set forth in 2 CFR § 2424 Subpart J. The purpose and authority of the Mortgagee Review
Board is set forth in 24 CFR Part 25. This Chapter of the MAP Guide implements 24 CFR part 200,
Subpart Y.
15.2
Authority to Issue MAP Sanctions
A. General.
1. At any time, a Hub/PC Director, the Director of the Office of Multifamily Housing Production
(OMP) Headquarters, or the Director of Multifamily Asset and Counterparty Oversight Division
(MACOD) may initiate discussions with a MAP Lender regarding any concerns HUD has with
respect to any of the lender’s actions or personnel, or any changes the lender should make in using
its MAP authority.
2. If there are concerns about the lender’s underwriting and/or construction loan administration, a
Hub/PC Director, the Director of OMP or the Director of MACOD may take certain actions
detailed below.
3. Every HUD multifamily employee must refer any possible instances of fraud, material
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Chapter 15
Quality Assurance Enforcement Actions
15.3
Basis for issuing a Warning Letter or
Sanctioning a MAP Lender
Document page 481
misrepresentation or other criminal violations to the Office of the Inspector General.
B. A Program Center Director may:
1. Recommend to the Hub Director that s/he recommend to the Director of MACOD the Probation,
Suspension or Termination of a MAP Lender.
2. Initiate the issuance of a LDP of an individual or a firm involved in a “covered transaction” as
defined in 2 CFR 2424.220.
C. A Regional Director may:
1. Recommend to the Director of OMP or MACOD the issuance of an LDP to an individual or firm
involved in a “covered transaction” as defined in 2 CFR 2424.220.
2. Recommend to the Director of OMP or MACOD that the MAP Lender be referred to the MAP
Lender Review Board for possible Probation, Suspension or Termination.
D. The Director of OMP or MACOD may:
1. Refer an individual or a firm involved in a “covered transaction,” as defined in 2 CFR 2424.220 to
Headquarters’ Deputy Assistant Secretary (DAS) for Multifamily Housing for imposition of an
LDP, which may be imposed nationwide or on a more geographically restricted basis.
2. Refer the MAP Lender to the MAP Lender Review Board for possible Probation, Suspension or
Termination.
3. Issue a Warning letter.
E. The DAS for the Office of Multifamily Housing Programs may:
1. Issue a Warning Letter.
2. Refer the MAP Lender to the MAP Lender Review Board.
3. Refer the MAP Lender to the Office of Inspector General.
F. All recommendations authorized in Sections 15.2B through E shall be in writing, and shall state the
reasons for the recommendations and the supporting facts. Recommendations for an enforcement
action shall be transmitted to the next higher level of review, as set forth above, together with copies
of all supporting documents.
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Chapter 15
Quality Assurance Enforcement Actions
15.3
Basis for issuing a Warning Letter or
Sanctioning a MAP Lender
Document page 482
Basis for issuing a Warning Letter or Sanctioning a MAP Lender
A MAP Lender’s improper, inaccurate or inadequate underwriting and construction loan administration
may lead to a Warning Letter or other sanction from HUD. Examples include, but are not limited to, the
following:
A. Minor offenses that may be the basis for a Warning Letter include:
1. Failure to provide required exhibits or the submission of incomplete or inaccurate exhibits.
Although the MAP Lender will be permitted to correct minor errors or provide additional
information, substantial inaccuracies or lack of significant information will result in return of the
application and retention of any fees collected.
2. Repeated failure to complete processing to Firm Commitment unrelated to the project underwriting
analysis.
3. Preparation of an underwriting Narrative Summary that is not supported by the appropriate
documentation and analysis.
4. Failure to notify the HUD processing office promptly of changes in the mortgage loan application
for a Firm Commitment that has been submitted, such as changes in rents, numbers of units or
gross project area.
5. Failure to meet MAP closing requirements or construction loan administration requirements.
6. Business practices that do not conform to those generally adopted by prudent lenders or that show
irresponsibility.
7. Failure to cooperate with an MACOD review.
B. Serious offenses that might be the basis for a Warning Letter, Probation, Suspension, or Termination
include:
1. Receipt of multiple Warning Letters over any one-year period. In determining which sanctions to
pursue as a result of prior warning letters, HUD will consider the circumstances surrounding those
warning letters and any corrective actions undertaken by the lender.
2. Fraud or material misrepresentation in the lender’s participation in FHA multifamily programs.
3. Lender collusion with or influence upon third party contractors to modify reports prepared by the
contractor that affect the contractor’s independent evaluation.
4. A violation of MAP procedures by a third party contractor, which the MAP Lender knew, or
should have known, was occurring and which, if performed by the MAP Lender itself, would
constitute a ground for a sanction under this chapter.
5. Evidence that a lender’s improper, inadequate or inaccurate underwriting was a cause for
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assignment of an insured mortgage.
6. Identity-of-interest violations under Section 2.7 of this Guide.
7. Payment by or receipt of a payment by a MAP Lender of any kickback or other consideration,
directly or indirectly from the sponsor or from any other participant in the transaction, which
would affect the lender’s independent evaluation, or represent a conflict of interest, in connection
with any insured mortgage transaction.
8. Failure to comply with any agreement, certification, undertaking, or condition of approval listed in
a MAP Lender’s application for approval.
9. Noncompliance with any requirement or directive of the Director of OMP or MACOD.
10. Violation of the requirements of any contract with HUD or violation of the requirements in any
statute, regulation, handbook, notice, mortgagee letter, or other written rule or instruction including
the MAP Guide as interpreted by answers to Frequently Asked Questions (FAQ’s) that are posted
on the MAP website.
11. Submission of false information or a false certification to HUD in connection with any MAP
mortgage transaction.
12. Failure of a MAP Lender to respond in a timely manner to inquiries from the Director, OMP or
MACOD in accordance with this Chapter.
13. Indictment or conviction of a MAP Lender or any of its officers, directors, principals or employees
for an offense that reflects on the responsibility, integrity or ability of the lender to participate in
MAP.
14. Employing or retaining an officer, partner, director or principal at the time when the person was
suspended, debarred, ineligible or subject to a LDP, or otherwise prohibited from participation in
HUD programs, when the MAP Lender knew or should have known of the prohibition.
15. Employing or retaining an employee who is not an officer, partner, director or principal, and who
is or will be working on HUD-FHA program matters, at a time when that person was suspended,
debarred, ineligible, or subject to a LDP or otherwise prohibited from participation in HUD
programs, when the MAP Lender knew or should have known of the prohibition.
16. Failure to cooperate with an audit or investigation by the HUD Office of Inspector General or an
inquiry by HUD into the conduct of the MAP Lender.
17. Failure to fund insured mortgage loans or any misuse of mortgage loan proceeds.
C. The issuance of a Warning Letter is not a prerequisite to the Probation, Suspension or Termination of a
lender’s MAP privileges.
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Chapter 15
Quality Assurance Enforcement Actions
15.4
Administrative Record
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Administrative Record
When any final action is taken against a MAP Lender, an administrative record must be prepared which
includes all materials that may have influenced the decision and not merely those relied upon in the final
decision. Although not intended to be an exhaustive listing, examples of material that should be included
in the record are:
•
Correspondence between the lender and HUD or the lender and any third party contractors;
•
E-mails, if relied on in the decision process;
•
Fax’s including the FAX cover sheet and the FAX confirmation sheet;
•
Application and underwriting submissions;
•
Copies of appropriate sections of notices, guide books including FAQ’s posted on the Multifamily
web site, handbooks, regulations and statutes;
•
Notes from meetings and telephone conversations; and
•
Work product and recommendations from subordinates.
The term “final action” includes issuance of a Warning Letter but does not include any referral,
recommendation for action, or presentation to the Director of OMP or MACOD. In matters before the
Director of OMP or MACOD, the administrative record ordinarily will consist of the referral and the
materials accompanying the referral, any written materials submitted by the lender and any written
materials submitted by the Director of OMP or MACOD in response to those materials, the transcript of
the informal meeting when that transcript is a part of the record, and the final decision of the Director.
NOTE: Intra-agency memoranda and other such records should be included, but will not be released if
privileged. The administrative record in its final form as described in this Section relates to and
supports HUD’s final action and is not to be released to any person outside of HUD until it has been
reviewed by the Office of General Counsel. All evidentiary material supporting any recommendation to
the MAP Lender Review Board must be delivered to the lender as provided in Section 15.13.A and must
be included in the administrative record.
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Chapter 15
Quality Assurance Enforcement Actions
15.5
Warning Letters
Document page 485
Warning Letters
A. The Director of OMP, MACOD and the DAS may issue a Warning Letter to a MAP Lender.
B. The Warning Letter:
1. May require a meeting in the official’s office with principal owners of, and/or Officers of the MAP
Lender to discuss the problem(s) and possible corrective action(s).
2. Shall specify the violation(s) for which the Warning Letter is issued. If the Warning Letter
explains or interprets a section of the MAP Guide, the text of the letter (after deleting all
information that might identify the MAP Lender concerned) shall be posted on the Multifamily
MAP web site as a FAQ.
3. Direct the taking of a corrective action.
C. The Warning Letter does not suspend a lender’s MAP privileges but may impose a higher level of
review of the lender’s underwriting by the Hub/PC and/or Headquarters.
D. The Warning Letter must clearly state that it is a Warning Letter issued pursuant to this Chapter. The
letter will be mailed to:
1. The MAP Lender’s contact person as listed on the MAP website.
2. The Director of MACOD, along with a copy of the administrative record.
E. The lender may request a copy of the administrative record prepared with respect to a Warning Letter.
15.6
MAP Probation
Only the MAP Lender Review Board may place a lender on probation. Probation is intended to be
corrective in nature and not punitive. As a result, release from probation is conditioned upon the lender
meeting a specific requirement or requirements, such as replacement of a staff member.
A. During the probation period a MAP Lender may:
1. Not submit, and the Hub/PC may not accept, materials after the close of business of the date of the
probation letter, for a new:
a. MAP Pre-application for a Section 220 or 221(d) project involving new construction,
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substantial rehabilitation; or
b. MAP Firm Commitment application for a Section 223(a)(7) loan or an application for Section
207 pursuant to Section 223(f) project involving a purchase or refinance.
NOTE: If either a new Pre-application or a new Firm Commitment application for a Section 207
pursuant to Section 223(f) was accepted after the date of the probation letter, it must be returned to the
MAP Lender.
2. Continue to process any:
a. MAP Section 220 or 221(d) project involving new construction/substantial rehabilitation when
a pre-application was submitted to a Hub/Program Center before the date of the probation letter.
b. MAP Section 207 (pursuant to Section 223(f) project involving purchase or refinance when a
Firm Commitment application was submitted to a Hub/Program Center before the date of the
probation letter.
B. Probation continues until all corrective actions required by the OMP or MAP Lender Review Board
(for example, exclusion of a specific staff member from work on MAP loans) are taken by the MAP
Lender. When all corrective actions have been taken, the MAP Lender shall notify the OMP. Once
the OMP is satisfied that the corrective actions have occurred, the Probation period shall end. A false
statement that corrective action has been taken constitutes a false certification as described under
Section 15.3, and may constitute a violation of 18 US.C. § 1001. A lender’s failure to take prompt
corrective action after Probation has become final may be the basis for Suspension or Termination.
C. Probation is in effect nationwide and the lender’s name shall be removed from the MAP-Approved
Lender list on the web. When Probation is lifted, the lender’s name shall be re-posted.
D. The Notice of Action placing a lender on probation will be:
1. Sent by overnight delivery;
2. Addressed to the MAP Lender’s contact person as listed on the Multifamily MAP website; and
3. Signed for by an employee of the MAP Lender upon receipt.
E. Refer to Section 15.12 and 15.13 for sanction and notice procedures.
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MAP Suspension
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MAP Suspension
Only the MAP Lender Review Board may suspend a lender’s MAP eligibility.
Suspension will not exceed 12 months except when special conditions are imposed. If both a time limit
and conditions are imposed, suspension will terminate only when the time period has expired, the MAP
Lender has submitted a certification of compliance with the conditions to the Board and the Board has
notified the lender it is satisfied that the corrective actions have occurred.
A. During the suspension period a MAP Lender may not:
1. Submit application materials after the close of business of the date of the suspension letter for a new:
a. Pre-application for a Section 220 or 221(d) project involving new construction/substantial
rehabilitation; or
b. MAP Firm Commitment application for a Section 223(a)(7) loan or an application for Section
207 pursuant to Section 223(f) project involving a purchase or refinance.
If either a new Pre-application or a new Firm Commitment application for a Section 207 pursuant
to Section 223(f) was accepted after the date of the suspension letter, it shall be returned to the MAP
Lender.
2. Continue to process any:
a. Section 220, or 221(d) project involving new construction/substantial rehabilitation when a
pre-application was submitted to a Hub/Program Center before the date of the suspension letter.
b. Section 207 pursuant to Section 223(f) project involving purchase or refinance when a Firm
Commitment application was submitted to a Hub/Program Center before the date of the
suspension letter.
B. The Notice of Action placing a lender on Suspension will be:
•
Sent by overnight delivery;
•
Addressed to the MAP Lender’s contact person as listed on the Multifamily MAP website; and
•
Signed for by an employee of the MAP Lender upon receipt.
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MAP Termination
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C. Suspension is in effect nationwide and the lender’s name shall be removed from the MAP-Approved
Lender list on the web. When Suspension is lifted, the lender’s name shall be re-posted.
D. Refer to Sections 15.12 and 15.13 below for sanction and notice procedures.
15.8
MAP Termination
Only the MAP Lender Review Board may terminate a lender’s eligibility for MAP.
A. A terminated lender may not submit, and the Hub/PC may not accept, materials after the close of
business of the date of the termination letter for a new:
1. Pre-application for a Section 220 or 221(d) project involving new construction/substantial
rehabilitation; or
2. MAP Firm Commitment application for a Section 223(a)(7) loan or an application for Section 207
pursuant to Section 223(f) project involving a purchase or refinance.
B. Any MAP pre-application or MAP application in process may no longer be processed by the terminated
lender. The lender will either:
1. Immediately transfer the transaction to the TAP procedure and the Hub/PC will completely
reprocess all stages of the transaction; or
2. Immediately transfer the project to a new MAP Lender. The new MAP Lender must completely
reprocess all stages of the transaction. At no time may the new MAP Lender assign the Preapplication, the firm application, the mortgage insurance commitment, or the insured construction
loan back to the original MAP Lender.
C. The Department will not endorse any MAP loan processed by the terminated lender unless a Firm
Commitment was issued before the date of termination.
1. Firm Commitments involving new construction or substantial rehabilitation must be immediately
transferred to a new MAP Lender. At no time may the new MAP Lender assign the Firm
Commitment, or the insured construction loan, back to the original MAP Lender.
2. Firm Commitments issued for Section 223(f) projects may be transferred before final endorsement
to any approved MAP Lender or kept in the lender’s portfolio.
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Quality Assurance Enforcement Actions
15.9
Settlement Agreements
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3. For those construction loans that have been initially endorsed, the MAP Lender will lose its MAP
privileges for construction loan administration. HUD will assume all the construction loan
administration duties as it normally performs for TAP processing.
D. The original lender may not service a transferred loan once it is finally endorsed.
E. An application for reinstatement of MAP authority may not be made for 12 months after the date of
termination. The requirements for reinstatement shall be the same as for initial qualification and the
applicant must show that the problems, which led to termination, have been resolved.
F. The Notice of Action terminating a lender will be:
1. Sent by overnight delivery;
2. Addressed to the MAP Lender’s contact person as listed on the Multifamily MAP website; and
3. Signed for by an employee of the MAP Lender upon receipt.
G. Termination is in effect nationwide and the lender’s name shall be removed from the MAP-Approved
Lender list on the web.
H. Refer to Sections 15.12 and 15.13 below for sanction and notice procedures.
15.9
Settlement Agreements
A. The Director of OMP and MACOD is authorized on behalf of the Office of Multifamily Housing to
negotiate settlement agreements with MAP Lenders.
1. Before the Director of OMP or MACOD has recommended a MAP Lender to the MAP Lender
Review Board for possible Suspension or Termination, the DAS for Multifamily Housing or
his/her designee must approve any proposed settlement agreement.
2. Settlement negotiations may occur before or after the issuance of a warning letter. Prior to referral
of the action to the Board, the DAS is authorized to approve a settlement agreement. Once an
action is referred to the MAP Lender Review Board, only the Board may approve the settlement
agreement.
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B. Settlement agreements may provide for:
1. Cessation of any violation.
2. Correction or mitigation of the effects of any violation.
3. Removal of lender staff from positions involving origination, underwriting and/or construction
loan administration.
4. Actions to collect monies wrongfully paid by the MAP Lender to a third party.
5. Implementing or revision of a Quality Control Plan or other corrective measure acceptable to
HUD.
6. Modification of the duration or provisions of any administrative sanctions HUD deems
appropriate.
C. A MAP Lender’s compliance with a settlement agreement is evidenced by certifying its compliance
with the conditions of the agreement and by HUD determining that the lender is in compliance with
the conditions of the agreement.
D. Failure by a MAP Lender to comply with a settlement agreement may result in referral to the MAP
Lender Review Board or the Mortgagee Review Board for probation, suspension or termination.
15.10
MAP Lender Review Board
A. The Board is authorized to take action against any MAP Lender that violates MAP requirements.
B. Composition.
1.
The Board shall consist of three Multifamily Housing Officials designated by the DAS for
Multifamily Housing.
2. Board Members.
a. Are selected from among Hub and Program Center Directors or Multifamily Housing
employees.
b. May serve on a continuing basis or may be chosen for the particular review, as the DAS
determines.
c. Shall have no prior business affiliation or other conflicts of interest with the lender under
review.
d. Shall select one of their members to act as Chairman of the MAP Lender Review Board.
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e. Are expected to have knowledge of multifamily housing origination, underwriting and
construction loan administration procedures.
3. The following individuals cannot serve on the Board:
a. The Hub/Program Center Director making the recommendation;
b. Staff from the Hub/Program Center making the recommendation;
c. The Director of OMP or MACOD; and
d. Staff from OMP and MACOD
C. Non-voting Advisors to the Board.
1. Designee of the Office of Inspector General
2. Designee of the Office of General Counsel
D. The Director of OMP or MACOD or his/her designee presents the cases to the MAP Lender Review
Board
E. Functions, Duties and Powers.
1. The MAP Lender Review Board is authorized to impose appropriate sanctions on a MAP Lender
after:
a. Conducting an impartial review of all information and documentation submitted to the board;
and
b. Making factual determinations that there has been a violation of MAP requirements.
2. In determining what action is appropriate, the Board will consider among other factors:
a. The seriousness and extent of the violation(s);
b. Any history of prior offenses;
c. Deterrence of future violations;
d. Any inappropriate benefits received by the MAP Lender;
e. Potential inappropriate benefit to other persons; and
f. Any mitigating factors.
3. The Board may refer:
a. A MAP Lender to:
(1) The Mortgagee Review Board for possible termination as a HUD-FHA approved
mortgagee or lender, and/or imposition of civil money penalties for knowing and material
violations of HUD-FHA requirements (see Section 15.17)
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The Office of Inspector General
b. An individual or firm involved in a “covered transaction,” as defined in 2 CFR 2424.220 to the
DAS for imposition of an LDP which may be imposed on a nationwide basis or on a more
restricted geographic basis.
15.11
Support Staff for MAP Lender Review Board
A. The Chairman of the Board supplies the clerical staff for the MAP Lender Review Board. The clerical
staff:
1. Coordinates Board activities with other HUD offices and government agencies.
2. Develops the agenda and policy issues for Board meetings.
3. Notifies a MAP Lender of any sanction imposed by the Board.
4. Notifies a MAP Lender, when the Board is to consider sanctions.
5. Keeps the official minutes of the Board and the case files and all Board actions.
6. Drafts all notices, orders, letters, and directives on behalf of the Board.
7. Performs other duties assigned by the Chairman or as directed by the Board.
B. The Director of OMP or MACOD or his/her designee serves as the prosecutor and:
1. Are the contacts on all matters concerning the Board.
2. Presents the sanction cases to the Board.
3. Collects, analyzes, prepares and submits to the Board the charging document and supporting
documentation together with possible options or recommendations as to sanctions against a MAP
Lender.
4. Refers cases for Board consideration.
5. Negotiates settlement agreements with MAP Lenders.
6. Prepares the administrative record of all matters before the Board.
C. Office of Inspector General
1.
Refers MAP Lenders for Board consideration as a result of audits or investigations.
2.
Performs audits or investigations of approved MAP Lenders.
D. Office of General Counsel.
1.
Advises the Board as to the legal sufficiency of actions it proposes to take.
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2.
Assists the Board in the drafting of Board decisions and orders.
3.
Assists the Director of OMP or MACOD in settlement negotiations.
4.
Provides other legal advice as requested by the Board.
15.12
Procedures for Sanctions
A. Requests for MAP Lender Review Board Action. The Director of OMP or MACOD, or his/her
designee, may refer a MAP Lender to the Board for consideration of sanctions.
1.
Any referral from a Hub Director must be sent to the Director of OMP or MACOD.
2.
The referral must contain a written report, which includes:
a. A full factual background description of the violations;
b. Specific citations of the Department’s requirements that have been violated; and
c. All available supporting documentation that bears upon the violations (the administrative
record discussed earlier)
3. There is no notification to the lender until the Board is constituted and receives the charging
documents from the Director of OMP or MACOD. (At that point, notification under Section
15.13 is automatic, and does not require substantive consideration by the Board of the nature
of the charge.)
B. Appointment of the Board.
When the Director of OMP or MACOD intends to send a referral to the MAP Lender Review Board,
s/he requests the DAS to appoint a Board, as described in Section 15.10.
C. Initial Consideration by the Board.
When the Board receives a referral from the Director of OMP, the Board members may confer by
email or by conference calls or in person. Any record of confidential communications between and
among Board members at this stage of the proceedings is privileged from disclosure and will not be
part of the administrative record of any matter.
D. Informal Conference.
1. The lender may request an informal conference as discussed in Section 15.13, which the Board will
schedule.
2. After notifying the lender and permitting the lender an opportunity to respond, the Board will meet
with the lender or its designees and with the Director of OMP and his/her designees to review
documentary evidence and presentations by both sides (see Section 15.13).
a. Transcript of the informal meeting.
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(1)
No transcript of this informal meeting will be made, unless the lender elects to have a
transcript made by a certified court reporter at its own expense. If the lender elects to have a
transcript made, it must provide three copies of the transcript to HUD within five business
days of the informal meeting. The transcript will not become a part of the record unless it is
submitted within the 5-day time frame.
(2)
If a transcript is not provided within the time limit set forth above, oral statements made at
the informal meeting will not be considered as part of the record, except that the Board may
consider voluntary admissions, made by a representative of the lender, of any element of the
violation charged.
Any additional documents, evidence, or written arguments, which the lender wishes to present to
the Board, must be presented within five working days after this informal meeting.
E. Action by the Board.
1. Upon consideration of evidence submitted by the Director of OMP or MACOD and the MAP
Lender, the Board will confer and make a final decision regarding the matter.
2. Any final decision by the MAP Lender Review Board placing a lender on Probation, or
Suspension, or Terminating a lender shall be in writing and shall state the reasons for the decision
and the facts supporting those reasons. Higher level officials and decision makers, including the
MAP Lender Review Board, are not bound by the recommendations from other HUD officials
described above, except that the Board may not take any action against a lender which is more
severe than the action recommended by the Director, OMP or MACOD. In any case where the
action taken or the recommendation made differs from the recommendation received, that
difference shall be explained in writing.
F. Effective Date of Action.
Unless the Board decrees that a later date should apply, any sanction (probation, suspension or
termination) shall become effective on the date of the Notice of Action to the lender.
G. The lender may appeal the Board’s decision to the DAS for Multifamily Housing or his/her designee,
as specified in Section 15.15.
15.13
Notice of Violation
A. Before the MAP Lender Review Board reviews a matter for consideration of a sanction, the Board’s
Chairman will issue written notice of the proposed action to the MAP Lender’s contact person as listed
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on the Multifamily MAP web site. The notice is sent by overnight delivery and must be signed for by
an employee of the MAP Lender upon receipt. The notice:
1. Informs the lender that the Board is considering a specific violation.
2. States the specific alleged factual violations with citation to the Department’s requirements that
have been violated.
3. Includes as attachments copies of all documents evidencing the violation or upon which the Board
will be asked to rely in reaching a decision.
4. Provides the lender with the opportunity, within 15 business days from the date of the issuance of
the proposed action, to:
a. Meet informally with the Board in person or by video conference using HUD facilities at
Headquarters or one of the various Hub/PCs; and/or
b. Present written evidence and any other relevant information.
5. Offers the MAP Lender the opportunity to reply in writing to the Board within 15 business days
from the date of the issuance of the proposed action. Failure to reply may result in a determination
by the Board without considering the MAP Lender's comments.
6. Requires the response to be addressed to the Chairman of the Board. The response may not exceed
15 double-spaced typewritten pages and must include an executive summary, a statement of the
facts, an argument and a conclusion. All written material and supporting documentation must be
submitted in triplicate.
Accompanying the notice of violation is a copy of the charging document and all of the supporting
documentation that has been submitted to the Board.
B. The MAP Lender Review Board has the power to issue a Notice of Action discussed in Section 15.14
to terminate a lender, or to place a lender on probation or suspension without advance notice to the
lender when there is an imminent need to protect the financial interests of the Government. No such
action shall be taken except upon the written recommendation of the Director of OMP and approval of
the DAS for the Office of Multifamily Housing Programs upon a determination by the Board that
immediate action is necessary. In every such case, the lender shall be promptly notified of the Board's
decision and the reasons for it, and shall have the right to submit materials to the Board and appear
before the Board to seek a prompt reconsideration of the Board's decision.
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Notice of Action
A. A prompt decision is important when a MAP Lender has been placed on probation. The decision will be
communicated within 10 business days of the receipt of the lender’s information and/or the informal
conference.
B. The OMP or MACOD will notify the MAP Lender of its final determination by overnight delivery of a
written notice of the final decision to the MAP Lender’s contact person as listed on the Multifamily
MAP web site.
C. The final decision will:
1. State the nature and duration of the action.
2. State the violations and any factual findings.
3. Inform the MAP Lender of its right to an appeal conference.
4. May add or modify the reasons for the decision as stated in the notice.
D. A copy of the administrative record will be sent to the lender by overnight express within one business
day after the issuance of the final decision.
15.15
Appeals
A. Appeal Conference.
1. Whenever HUD imposes a sanction of probation, suspension or termination against a MAP
Lender, the lender may, within 10 business days of receiving the sanction letter, request in writing,
an appeal conference before the appeals official. The Appeals Official must be an individual who
has not previously been involved with the proceedings or settlement discussions up to this point.
2. No transcript of the appeal conference will be made, unless the lender elects to have a transcript
made by a certified court reporter at its own expense. If the lender elects to have a transcript made,
it must provide three copies of the transcript to HUD within five business days of the informal
meeting.
3. Oral statements made by any participant at this meeting are not considered as evidence on any
matter under consideration, except that the Appeals Official may consider voluntary admissions by
a representative of the lender of any element of the violation charged.
4. Any additional written arguments, which the lender wishes to present to the Appeals Official, must
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be presented within five business days after the date of the appeal conference.
5. While the appeal is pending, the notice of action is in effect.
B. The appeal conference regarding the Board’s action will be held within 10 business days of HUD
receiving the MAP Lender’s appeal request.
1. The Director of OMP provides the administrative record to the Appeals Official and points out the
evidence on which the decision was made; and
2. The MAP Lender may provide oral arguments in support of its position and the evidence
previously submitted. No new evidence may be submitted to the Appeals Official at this point.
C. A MAP Lender may voluntarily request and the Appeals Official may agree to have an appeal
conference held more than 10 but not more than 30 business days after the date of the lender’s request
for an appeal.
D. Within 10 business days after the date of the appeal conference, or the expiration of the period allowed
for the submission of documents and written arguments, whichever is later, the Appeals Official
makes a written determination. S/he may confirm, modify, or overturn the MAP Lender Review
Board’s decision. The Appeals Official shall include in his or her written determination the reasons
for confirming, modifying, or overturning the Board’s decision.
E. If the MAP Lender does not request a conference within 10 business days of receiving the sanction
letter, the right to a conference will be considered waived.
F. If the Appeals Official overturns the MAP Lender Review Board’s decision, the lender shall
immediately return to an active status as a MAP Lender. The active status of the MAP Lender will be
posted on the HUD web.
G. Participation in the appeal process is not a prerequisite to filing of an action for judicial review under
the Administrative Procedure Act.
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Limited Denial of Participation
The criteria and procedures in this section apply to suspensions and debarments as well as to limited
denials of participation. See Chapter 4 of OGC Handbook 1300.13 REV 1, Debarment, Suspension, and
Ineligibility of Participants and Contractors, and HUD Regulations at 2 CFR 2424. In case of any
conflict between this section and the foregoing authorities, those authorities control.
A. An LDP may be imposed upon any participant or contractor and its affiliates, except HUD-FHA
approved mortgagees. Examples of participants that may be sanctioned are (but are not limited to):
1. Independent Fee Appraisers
2. Third Party Cost Analysts
3. Needs Assessors
4. Environmental Analysts and Engineers
5. General Contractors
6. Architects
7. Specific underwriters or loan analysts
8. Application Sponsors
B. Once issued, the LDP may apply to any contractor, participant or to a participating organization. For
example, a specific appraiser may be issued a LDP, or an entire appraisal firm may be issued a LDP.
A LDP may also apply to all affiliates of that contractor or participant at the discretion of the imposing
official.
C. Conditions Warranting Referral to HQ Recommending Consideration for a National LDP.
Referral to Headquarters for recommendation for a National LDP shall be at the discretion of the Hub
Director. When it is determined that the offense warrants such a measure, the Hub Director should
forward all pertinent information along with a formal recommendation to the Deputy Assistant
Secretary for Multifamily Housing for review. The recommendation should include:
1. All related processing associated with the case(s) that initiated the action.
2. A narrative summary detailing the description and nature of the alleged offense(s) committed.
3. A synopsis of the participant’s historic performance in past cases dealing with the Department.
4. A recommend course of action to be taken.
D. Questions should be addressed to the Director of the Compliance Division of the Enforcement Center.
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Referral to the Mortgagee Board or the Inspector General
A. If the Hub/PC Director determines that a MAP Lender’s actions or failure to act appears to be a
compliance matter justifying action by the Mortgagee Review Board, including possible removal of its
authority to do business as an FHA Lender, s/he must bring this matter and the administrative record
to the attention of the Director, Office of Multifamily Production in Headquarters. The Director will
refer the matter to the Director of the Mortgagee Review Board Division in the Office of Housing
See Section 2-4, Requests for Mortgagee Review Board Action, HUD Handbook 4060.2 REV 2,
Mortgagee Review Board, and HUD Regulations at 24 CFR 25.
B. If the issue involves possible fraud, material misrepresentation or other criminal violations, then the
matter should be referred to the Office of Inspector General.
See Section 3-1, Responsibilities of Departmental Management and Employees, OIG Handbook
2000.3 REV-4, Office of Inspector General Activities.
15.18
Other Enforcement Actions
Notwithstanding any provisions contained elsewhere in this Guide, HUD reserves the right to pursue
remedies for false claims and false statements, as authorized by the False Claims Act, 31 U.S.C. §§ 37293731,the Program Fraud Civil Remedies Act, 31 U.S.C. §§ 3801-3812 and Civil Money Penalties under
12 U.S.C. § 1735f-14.
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Master Lease Structuring to Facilitate the use of
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16.1
Introduction
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Chapter 16
Master Lease Structuring to
Facilitate the use of Historic or
New Market Tax Credits
16.1
Introduction
This chapter addresses the use of Master Leases when Historic and/or New Markets Tax Credits are used
in conjunction with an FHA-insured loan. These transactions may or may not have Low Income Housing
Tax Credits as well. HUD’s goal is to accommodate this type of structuring without compromising
appropriate regulatory oversight and controls.
This chapter does not address ground leases or leasehold interests in an entire project for purposes other
than Historic or New Market Tax Credits, commercial leases or sublease agreements (of either
commercial space or residential units).
16.2
Background
Master Leases maximize the benefits of combining Federal or State Historic Tax Credits and New
Markets Tax Credits. The projects may or may not use Low Income Housing Tax Credits as well.
Investors and developers participating in these programs benefit from increased leverage for project
financing and premium pricing for equity, while reducing the need for additional debt.
Typically, these leases are structured to permit a combination of investments by one or more investors
under one or more tax credit programs in a single development project. A sample organization chart for a
master lease ownership structure is included in Appendix 16A. Generally the Master Lease structure
involves the following parties, which often have total or partial identities of interest and common
ownership:
•
FHA Borrower – the Single Asset Mortgagor Entity (the lessor for the Master Lease);
•
Master Tenant – the lessee; and
•
Master Lease Sub-lessees for Residential units, and for Commercial space.
The Master Tenant must pay the Borrower/lessor rent that equals or exceeds the amount necessary to
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satisfy all financial obligations required under the insured mortgage and to operate the property in
accordance with all HUD directives, regulations and contracts. The Master Tenant and all Master Sublessees (but not the individual residential and commercial tenants) will execute HUD Regulatory
Agreements and submit financial reports to HUD.
The HUD Multifamily Regional Center or Satellite Office will be responsible for approving Master Lease
ownership structures in accordance with this chapter’s requirements. The Regional Center Director retains
waiver authority, but waivers of any provisions of this chapter should be discussed with and reviewed by
Headquarters (HQ) Office of Multifamily Production prior to approval.
16.3
General - Programmatic Requirements
In addition to other program requirements, the following are conditions for projects that use a Master
Lease structure:
A. The insured mortgage must be in first lien position with respect to all project collateral. The fee simple
ownership in the land and improvements provides the security for the mortgage.
B. All documents should include conflict language giving the HUD documents supremacy over other
documents, except as otherwise permitted by HUD, and may not include indemnification provisions.
In some cases HUD may allow non-monetary matters such as affordability use restrictions to be
recorded ahead of HUD’s mortgage but such variances are allowed only on a case by case basis.
C. The Master Tenant and Master Sub-lessees must be single asset entities. Tenant-in-Common structures
and Delaware Statutory Trusts are not eligible, though such entities may hold an “upper tier” interest
in the single asset entities. The Master Tenant and Master Sub-lessees may not engage in any other
businesses or activity, including the operation of any other rental project, or incur any liability or
obligation except as permitted by HUD in connection with the project.
D. The Master Tenant and Master Sub-lessees must execute the standard HUD Regulatory Agreement
and Rider, to address various ownership and operational responsibilities with respect to the mortgaged
property.
E. The Master Tenant and Master Sub-lessees (as well as the Management Agent) must file management
certifications and management entity profiles (HUD forms -9839 and -9832). HUD may require a
management agreement to be terminated, in accordance with the terms and conditions contained in the
management certification.
F. Net rentable commercial area as a percentage of gross floor area and income will be determined in
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accordance with the applicable FHA program limitations.
G. The Master Lease and all Sub-leases (sometimes collectively referred to as “Leases”) shall be
subordinate to the insured mortgage and subject to approval by HUD prior to execution. The Leases
may not be modified or amended thereafter without the prior written consent of HUD, and may be
terminated by HUD in the event that the insured mortgage is assigned. Any proposed modifications or
amendments to the Leases must be approved by HUD’s Regional Counsel. The Leases must
incorporate by reference the Regulatory Agreement, HUD rules, regulations and directives, and
contain an agreement to comply with their requirements. The Leases must include an obligation to
pay all rent due to the Lender, in the event of a default under the loan documents. The loan documents
may be amended to provide notice of default to the Master Tenant contemporaneously with the giving
of notice to the Borrower/Lessor, and the acceptance of a cure of such default, during such notice
period, from the Master Tenant on behalf of the Borrower/Lessor. Any such cure must occur prior to
the assignment to HUD, and will be limited to one opportunity to cure during each 12 month time
period.
H. Surplus cash determinations will be made in accordance with the Regulatory Agreements and will be
made as if the entire project is owned and operated by one single purpose entity.
I. All financial operations and reporting are governed by 24 CFR, Part 5, Subpart H.
J. The rent paid by the Master Tenant must equal or exceed the monthly principal and interest payments
due on the insured mortgage and all required escrows and reserves.
K. All business agreements must be disclosed and are subject to HUD approval during loan underwriting
(including, for example, inter- or intra-company loans, investor or outsider loans other than the insured
mortgage, investor controls over operations, actions and deliverables that affect regulatory or
contractual compliance or performance, etc.). The Firm Commitment will incorporate any conditions
imposed by HUD with respect to such agreements.
L. Any proposed payments (equity contributions, fees, income, etc.) to the Borrower, Master Tenant,
Master Sub-lessees by a syndicator or investor must be disclosed to HUD and approved during loan
underwriting, and thereafter be reflected on the annual financial statement filings and on any required
monthly reporting. If such payments are made while any party is in non-compliance with the
Regulatory Agreement, enforcement action will be taken against all principals in the organization,
subject to the notice and cure provisions in above subsection E.
M. Master Leases and Sub-leases must prohibit assignments or subleases (except to the end-users of the
commercial spaces and apartment residents), unless previously approved by HUD in writing.
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Processing Requirements
A. Firm Commitment Special Conditions:
1. The policies and procedures involving master lease structuring to facilitate the use of tax credits
are incorporated herein and made a part of this Commitment for insurance of advances,
specifically including, without limitation, the terms and conditions contained in Chapter 16 of the
MAP Guide. All information submitted to HUD with the Application for Multifamily Housing
Project, Form HUD-92013, to evidence the satisfaction of such terms and conditions shall be true
and correct as of the date submitted, and must continue to be true and correct at the time of Initial
Endorsement.
2. This commitment is subject to, and has been issued upon the reliance of, the successful (a)
allocation to the project of LIHTC, Historic Tax Credits or New Markets Tax Credits and (b)
syndication of such credits, with an appropriate agreement for the timely investment of equity, as
shown on Forms HUD-2880 and HUD-92013, to assure completion of the project and pay other
associated and incidental costs. In addition to the standard provisions that must be included in the
organizational documents for the borrower entity, a provision must be added that prohibits any
changes to the organizational documents that affect the obligations of the tax credit investor
without the written consent of the Lender and HUD.
3. Notwithstanding the issuance of this commitment, this commitment remains subject to, and HUD’s
obligations hereunder are conditioned upon the satisfactory resolution, as determined by HUD, of
the adverse items determined by HUD during the Previous Participation Review process.
4. As an accommodation, this commitment has been issued and based upon schematic drawings,
instead of the final Drawings and Specifications. At least 30 days prior to the scheduled date for
initial endorsement, HUD must receive the final Drawings and Specifications for review and
approval to ensure consistency of design and cost. In the event that there is a net cumulative
construction cost increase or change in the design concept, or a net cumulative construction cost
decrease in the amount of more than 5%, this commitment shall be subject to and conditioned upon
the further approval of the HUD, to be evidenced in writing, and may be terminated and voided by
the HUD, or additional conditions may be imposed, at HUD’s option.
5. (See Section 5.28 for further policy guidance on the deferral of final plans and specifications at
Firm Commitment when tax credits are involved.)
6. Prior to and as an additional condition of Final Endorsement, because the project is exempt from
providing a cost certification, when the project reaches 100% substantial completion, as deemed by
the HUD Inspector, the Lender will be notified of the substantial completion date, and the
Borrower must account for all operating income during construction and ending three months prior
to the originally scheduled date of the first principal payment under the mortgage. An income and
expense statement must be submitted covering the period from first occupancy (if occupancy
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Master Lease Structuring to Facilitate the use of
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16.5
Cost Certification and Final Endorsement
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occurred during construction) or from the date of substantial completion (as deemed by the HUD
Inspector) through the period ending three months before the date of the first principal payment
under the mortgage as originally scheduled. The statement must be submitted to HUD, at least 30
days before the date scheduled for Final Endorsement. If the income and expense statement
evidences receipt of income net operating income during this period, the Borrower may be
required to handle the funds in accordance with current cost certification guidance.
B. The following forms should be revised to reflect the lease structure and HUD requirements:
1. Form HUD-92434M, Lender’s Certificate (formally Borrower’s Certificate) - To include language
that clearly states that the Master Tenant and Sub-lessees must report lease payments during the
construction period as rental income.
2. Form HUD-93305M, Agreement and Certification - To include language that clarifies that the
Borrower must report all receipts and disbursements from the date of first occupancy and during
the rehabilitation period for substantial rehabilitation cases.
C. Each Master Lease or Master Sub-Lease must be recorded in the appropriate real estate records, along
with the Regulatory Agreement executed by each Master Tenant or Master Sub-Lessee. These
documents must also be included in Schedule B, Part II of the title insurance policy. In jurisdictions
where recording these leases would result in a substantial tax, a Memorandum of Lease may be used.
In lieu of recording the lease(s), a lease memorandum approved by the HUD Multifamily Regional
Center Director, after consultation with field counsel, may be filed.
16.5
Cost Certification and Final Endorsement
A. The Borrower/Lessor, the Master Tenant and all Master Sub-lessees will be required to cost certify
the actual costs of the project unless the property contains Low Income Housing Tax Credits and
HUD determines at the time of Firm Commitment issuance that it has a loan to cost ratio of less
than 80 percent. The cost certification must contain a certification signed by an authorized agent
of each entity, audited by a CPA or IPA, and contain a Schedule of Tax Credit/Syndication
Proceeds that includes the following:
1. The amount of syndication proceeds received from the investing partner to date;
2. The purposes for which syndication proceeds received as of the cut-off date were used; and
3. The dates, terms, and conditions under which future investor contributions are to be made.
B. Total income of the Borrower/Lessor, including lease payments, is recognized during the
construction/rehabilitation period.
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Cost Certification and Final Endorsement
Chapter Index / Section Index
Document page 505
If the replacement cost mortgage (Criterion 3) is not the controlling mortgage and there is excess
NOI generated during construction, it may be applied to cover shortfalls in mortgageable soft
costs, change orders, initial operating deficit and escrows. At Final Endorsement, funds not
needed to cover shortfalls in costs or operating deficits may be distributed to the borrower or
deposited into the project’s Reserve for Replacement account or applied toward the amortization of
the mortgage principal.
If Criterion 3 is the controlling mortgage amount, HUD will determine if the balance of the NOI is
equal to or greater than 1% of the original mortgage amount and, if it is, will deduct this amount
from the certified replacement cost. When the NOI does not meet this 1% threshold, it can be used
toward shortfalls as noted above. Any remaining balance must be deposited into the project’s
Reserve for Replacement account at Final Endorsement and there is no distribution to the
borrower. The Borrower/Lessor, Master Tenant and Master Sub-lessees are required to submit a
certified operating statement which reflects the income collected and expenses incurred in
accordance with the lease agreements and all documents required by HUD. Refer to Chapter 13
for further details on cost certification and the exemption from cost certification.
C. A final Sources and Uses Statement must be included in the cost certification report as
supplemental information and will be reviewed to determine actual sources and uses.
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Chapter 17
Refinancing Cooperative Housing Projects under
Section 207 pursuant to Section 223(f)
17.1
Introduction
Chapter Index / Section Index
Document page 506
Chapter 17
Refinancing Cooperative
Housing Projects under Section
207 pursuant to Section 223(f)
17.1
Introduction
The following provides processing instructions for refinancing Cooperative Housing Projects under the
Section 207 pursuant to Section 223(f). This applies solely for refinancing a project and does not apply to
projects that include an acquisition. Please note that proposed conversions or projects undergoing
conversion, to cooperatives are not eligible for refinancing under this chapter.
17.2
Background
Cooperative ownership is popular in certain parts of the country, especially for low-to-moderate-income
occupants. HUD already insures traditionally processed mortgage loans to facilitate the construction and
substantial rehabilitation of Cooperative Housing projects under Section 213. Facilitating the refinancing
of a Cooperative under Section 223(f) will further the Department’s mission by assisting eligible
Cooperative projects to obtain refinancing to make necessary repairs and/or consolidate more expensive
outstanding debt, thereby serving to preserve the affordable housing stock. Refinancing the existing
underlying mortgage is considered to be a better alternative than expending a Cooperative’s reserve fund,
which would have a negative impact on its financial stability and would help to avoid the need for a
special assessment, which could harm low-to-moderate income occupants, especially those on a fixed
income.
17.3
Program Requirements
The Underwriting Summary must demonstrate compliance with all program requirements.
A. Loan Parameters. In accordance with Section 3.7.Q, HUD will insure a mortgage for a maximum term
of 35 years or 75% of the remaining economic life of the property, whichever is less. The maximum
insurable mortgage amount shall be the lesser of the following parameters as they relate to the criteria
in Form HUD-92264-A, “Supplement to Project Analysis”: (NOTE - An equity take out from a
refinancing loan is not permitted for cooperative housing projects.)
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Refinancing Cooperative Housing Projects under
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Program Requirements
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1. Criterion 1. Mortgage or Loan Amount Requested in Application.
2. Criterion 3. Amount Based on Value or Replacement Cost. The lesser of market value, valued as
a market rate rental project multiplied by a loan ratio of 65%, or the Gross Sell-off Value, as a
market rate cooperative project multiplied by a loan ratio of 55% (value definitions are contained
in Section II.B).
3. Criterion 4. Amount Based on Limitations per Family Unit. Use Section 207 statutory per unit
limits, adjusted by the local PC High Cost Percentage for the locality. Follow the outstanding
instructions for Criterion 4.
4. Criterion 5. Amount Based on Debt Service Ratio. A mortgage amount supported by 1.0 debt
coverage based on the projected NOI as an existing Cooperative project based on its historic
occupancy rate (up to 100%), which is NOI noted on line “5.e”.*
*NOTE: In addition to the calculation of Criterion 5, the underwriter must perform a feasibility
test comparing Criterion 5 as calculated above to a Criterion 5 calculation on a mortgage amount
supported by a 1.538 debt service coverage based on projected NOI as a market rate rental project,
which is NOI multiplied by 65%. The occupancy percentage for this scenario may not exceed
93%. This will be reported on page 4, “Remarks” of Form HUD-92264-A. If the amount based on
NOI as an existing Cooperative project exceeds the amount based on NOI as a market rate rental
project, the underwriter must comment on the feasibility of the project to continue as a
Cooperative.
5. Criterion 7. Criterion 7 is not to be completed since acquisitions are ineligible.
6. Criterion 10. Amount Based on Existing Indebtedness, Repairs and Loan Closing Charges.
Follow outstanding instructions. The cost to refinance includes funding, if applicable, the Initial
Funding of the Replacement Reserve and the Initial Deposit to the General Operating Reserve (see
Section 17.3.F below). No equity out is permitted under Section 223(f) when refinancing
Cooperatives, accordingly, the calculation for this criterion stops at line “10.g”.
7. Criterion 11. Amount Based on Deduction of Grants and Gifts and Loans. Line “11.a” shall be the
cost to refinance plus FHA Mortgageable items taken from Line “10.g”. Line “11.b” shall be total
of grants, gifts and loan intended to offset the cost of mortgageable items. Line “11.c” shall be
Line “11.a” minus Line 11.b”.
B. Eligible Borrowers.
Eligible borrowers include non-profit Cooperative Ownership Housing
corporations or non-profit Cooperative Ownership Housing trusts regulated under state law and
regulatory agreements that require membership eligibility and transfer of membership in a manner
approved by HUD. Limited profit ownership entities such as those established under the MitchellLama program in New York City may be acceptable pending review by local Counsel.
C. Application Processing. Applications for Cooperatives are processed in accordance with the current
Section 223(f) instructions except as modified here.
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17.3
Program Requirements
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Document page 508
D. Required Exhibits. All exhibits normally required for a Section 223(f) application must be submitted
with the following modifications and additions.
1. Rent Roll. The Rent Roll should be modified to indicate each shareholder’s name, unit location,
mailing address, whether or not the unit is owner occupied, whether or not the unit is subsidized,
date of occupancy, ownership percentage, amount of monthly maintenance charge, any special
assessments and past due balances of 30 days or more. For any units subject to local rent control,
the actual rent must be substituted for the maintenance fee amount. The Rent Roll should be
submitted as an Excel spreadsheet.
2. Cooperative Membership Exhibit. Subsequent to issuance of the commitment and prior to closing,
the lender must submit a statement of the cost to the borrower and the Cooperative Membership
Exhibit, Form HUD-93203. The number of members must equal the percentage (or number) of the
total number of units as specified in the commitment.
3. Original Project Prospectus (if available). The prospectus is prepared at the time of the original
public filing and contains a great deal of useful information for technical discipline processing by
HUD as well as the underwriter and preparers of third-party reports.
4. Financial Statements for the Past Three Years. Follow the current instructions contained in
Section 7.8.B and Section 8.4. The lender should review and evaluate any qualifications contained
in the reviews to ensure the financial statements reliably represent the property’s operating history
and the assumptions relied on in the underwriting and should pay particular attention to the history
of total past due balances of maintenance fees and special assessments. The total amount of the
unpaid balance (30 days or more) for maintenance charges and special assessments as shown in the
rent roll must not exceed 5% of the gross annual income.
5. Environmental Exhibits.
a. Contamination Analyses. A Phase I ESA, if necessary a Phase II ESA, and, if further
necessary, a remediation plan are required. See Chapter 9.
b. Environmental Report. As described in Chapter 9, an Environmental Report is required.
6. Additional Third-Party Reports. HUD may require additional specialized reports to ascertain the
safety and soundness of the property and its amenities as to their suitability as collateral for longterm financing.
7. Organizational Documents and Minutes. The Hub/PC will provide the documents set forth in
Handbook 4550.3, Existing Construction – Cooperative Housing. The following additional
exhibits are required:
a.
b.
c.
d.
e.
Certificate of Incorporation FHA Form No. 3234-B.
Resolution of Board of Directors to Mortgage Cooperative.
Shareholders authorization to Mortgage Cooperative.
Resolution of Board of Directors adopting FHA Form No. 3245, "Model Form of By-laws."
Shareholders authorizing adoption of FHA Form No. 3245,
"Model Form of By-laws."
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17.3
Program Requirements
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Document page 509
f. Minutes of the last six Board of Directors meetings.
g. Resolution of Board of Directors adopting FHA Form No. 3237, "Model Form of Occupancy
Agreement."
h. Resolution of Board of Directors adopting FHA Form No. 3237-A, "Model Form of Sublease."
E. Project Eligibility. The property must contain at least 5 residential units with complete kitchens and
baths, and have been completed or substantially rehabilitated for at least 3 years prior to the date of
application. Properties that were substantially rehabilitated with HUD-insured mortgages that have
been completed with an expired latent defects guarantee are exempt from the Three Year-Rule. If the
Cooperative was a conversion, the conversion must have been completed at least three years prior to
the application date. Proposed conversions or projects undergoing conversions are not eligible.
Projects with a recent or unresolved vacancy history, or a history of shareholders not paying dues,
maintenance fees and other co-op obligations, will not be considered for mortgage insurance.
The project must be fully subscribed, with no units owned by the original developer, prior to
endorsement and must meet these additional criteria:
1. Project Design. The project must be designed for primary residence only. Timeshares, resorts,
Cooperative hotels or rental pools are not permitted. Section 513 of the National Housing Act
prohibits the use of the insurance programs for transient or hotel purposes. The borrower and
individual shareholders cannot execute Occupancy Agreements for less than 30 days nor provide
occupants with hotel services such as maid service, furnishing and laundering of linens, room
service and bellboys. Units may not be sub-leased without the consent of the Cooperative
Corporation.
2. General Market Conditions. The Property must be located in an area evidencing strong market
understanding and acceptance of Cooperative housing. Financing for the purchase of individual
shares must be readily available from mortgage bankers/brokers, banks or saving and loan
institutions. The Underwriting Summary must cite recent sales within the building and indicate the
type of financing utilized.
3. Repair Threshold. A project cannot be processed under Section 223(f) if it meets the current
requirements for substantial rehabilitation in Section 5.12. Projects that are not eligible for
mortgage insurance under Section 207 pursuant to Section 223(f) should consider the Section 213
or Section 221(d)(3) programs.
4. Fair Housing Act / Equal Opportunity Requirements. All other applicable program requirements
for the Section 207 pursuant to Section 223(f) program must be met, including compliance with
applicable Civil Rights Laws, including the nondiscrimination and affirmatively furthering fair
housing provisions of the Fair Housing Act, and applicable accessibility requirements for persons
with disabilities.
a. Affirmative Fair Housing Marketing. The Affirmative Fair Housing Marketing Requirements
(24 CFR Part 200, Subpart M) apply to all insured projects of five or more units but projects
insured under Section 207 pursuant to Section 223(f) are exempt from the submission of a
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Refinancing Cooperative Housing Projects under
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Program Requirements
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Document page 510
written plan. However, a Section 223(f) applicant is required to maintain records of its
affirmative marketing efforts. Except in the case of a project specifically designed exclusively
for the elderly (see below), the borrower must certify that it will not discriminate against
families with children.
b. Accessibility for Persons with Disabilities. This is required for properties built after March 13,
1991, containing Fair Housing Act noncompliance. If a project built after March 13, 1991, is
submitted for Section 223(f) refinancing and the PCNA inspection reveals that it contains
noncompliance with the Fair Housing Act design and construction requirements, the
Department must require that the owner correct the noncompliance as a condition of insurance.
The extent of the noncompliance and the cost of correction will determine whether the project
is feasible as a Section 223(f) or whether to resubmit it as a substantial rehabilitation. In no
case may the Department insure projects with outstanding Fair Housing Act noncompliance.
5. Elderly Developments - (aka Golden Age Cooperatives). In refinancing of the underlying
mortgage for an existing Cooperative project designed for the elderly, the Department defines the
term “elderly person” in the National Housing Act (NHA) as a household composed of one or
more persons at least one of whom is 62 years of age or more at the time of initial occupancy.
Waiver of this definition is not permitted under any circumstances. It is noted that this definition
differs from the definition in use for Section 213 of the NHA. The Cooperative shall not provide
mandatory meals and services such as those associated with retirement service centers. No nonshelter services can be a mandatory condition of occupancy and must be reviewed by the lender
and approved by the Hub/PC for reasonableness. Non-shelter spaces already constructed for
projects with current HUD-insured mortgages may include formal dining areas with meal services
to be provided on an optional basis. All Cooperatives can provide modest kitchen equipment in a
non-shelter space for the use of occupants or for catering services. The kitchen should be
sufficient in size to support sanitary requirements. Additional requirements related to the
provision of meals are as follows:
a. Any meal service must be provided on an optional basis.
b. The cost of meals may not be included in the residents' rental charges.
c. The costs associated with the operation of the meals service are the responsibility of the entity
that operates the optional meal service.
d. The borrower may receive payment from the operator of the meals service. In such cases, this
revenue may not be included in the underwriting of the project, as this service is optional for
each resident, thereby potentially producing a revenue stream that is both unpredictable and
unreliable.
e. A determination should be made by the lender that the expenses associated with a third-party
meal provider will not increase the project risk.
f. Any meal service must be operated by a meal provider licensed under State or local law and in
compliance with current health and safety requirements for food service providers.
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Document page 511
g. Local HUD Counsel must determine that the granting or revocation of any licensing required
to operate a proposed meal service will not jeopardize the ability of the project to operate as
Cooperative Housing in accordance with the requirements of the Regulatory Agreement.
h. Costs associated with developing a facility insured under Section 223(f) to include a meal
service may be considered in the mortgage, subject to outstanding requirements limiting nonshelter space and commercial areas.
6. Owner Occupancy. At least 75% of the total number of residential units must be owned and
occupied by Cooperative members at the time of endorsement, and no more than 25% of the units
may be owned by investors.
7. Vacancy Rate. The project should not have a vacancy rate greater than 5% since a higher
vacancy rate may indicate a weak or problematic project or market. If an application is presented
with a higher vacancy rate, the underwriter must provide convincing market evidence to support
the transaction in the Underwriting Summary. The vacancy/occupancy rate used in underwriting
the loan should be based on the actual historic performance of the project, which can be 100%.
This applies only to Criterion 5 based on actual operation as a Cooperative project.
8. Turnover Rate. The sales history of the complex should display a healthy turnover rate to
demonstrate that the project is viable and that there is demand for the units. If the turnover rate is
less than 5% of the total number of owner-occupied units per year, the underwriter must determine
the reasons for the low turnover rate and why it does not pose an unacceptable risk, which must be
documented in the Underwriting Summary. However, it should be noted that a project and/or
market area may have a historically low turnover rate due to its popularity as a source of affordable
housing.
9. Adequacy of the Proposed Carrying Charges. The carrying charge must be sufficient to adequately
maintain the project at a level that would make it suitable as security for a long-term mortgage.
The Underwriting Summary must contain an analysis of the Appraiser’s findings regarding the
adequacy of the proposed carrying charge that will be in place after refinancing has occurred and a
discussion of the Cooperative project’s policy and history regarding increasing the carrying charge.
The Cooperative’s Bylaws or other appropriate organizational documents must contain a provision
that requires an annual increase in the carrying charge based on inflation, in order to address
increases in operating expenses.
10. Carrying Charge Increase. In general, the debt service resulting from the proposed mortgage
should not require a carrying charge increase of more than 5%, which may be exceeded, so long as
all of the following requirements are met:
a. The carrying charge is below market for properly maintained similar projects, and is not
sufficient to adequately maintain the project.
b. The Board of Directors must approve the carrying charge increase in accordance with its Bylaws the FHA Model Form of By-laws, FHA Form No. 3245.
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Document page 512
c. An analysis of the demographic data in the appraisal report must indicate the new maintenance
fee would be affordable for the typical resident.
d. Market analysis of the proposed maintenance carrying charge indicates that it is within market
limits for similar projects in the subject’s market area.
11. Commercial Space Limitations. The current Section 223(f) parameters must be followed.
12. Ownership of Commercial Space/Parking. Commercial and parking space at a Cooperative
Housing project may or may not be owned by the Cooperative. Only those spaces that are owned
by the Cooperative may be included as part of the collateral.
13. Ground Leases. Ground Leases must conform to the FHA Lease Addendum Form HUD-92070M.
The term of the lease addendum may be varied to conform with applicable State and local law,
except that the local HUD Closing Attorney must approve:
a. The legal need for any proposed lease term changes, and
b. That any term changes are consistent with the following requirements:
(1) Term is 99 years and is renewable, or
(2) Term is at least 50 years from the date the mortgage is executed (where a lease is on
trust/other land on a reservation the HUD Closing Attorney must ensure that the lease
provisions are coordinated with Bureau of Indian Affairs’ requirements).
F. General Operating Reserve (GOR). Cooperatives are required by the Regulatory Agreement, FHA
Form No. 3225 to establish and maintain a GOR which is a percentage of the monthly carrying
charges. The carrying charge is the sum of all project expenses, replacement reserve, taxes and debt
service.
1. GOR formula.
a. The GOR is maintained by a monthly payment of 3% of the monthly carrying charges.
b. When the GOR account reaches 15% of the annual carrying charges, the monthly rate may be
reduced to 2%.
c. When the GOR account reaches 25% of annual carrying charges, monthly accruals may be
discontinued until the account is reduced below 25%.
d. Anytime the GOR falls below the 25% level, monthly payments to the account shall be
resumed at a 2% to 3% rate, as noted above, until the 25% level is restored.
2. In addition to any Initial Deposit to replacement reserve, the Cooperative borrower may be
required to make an Initial Deposit to the GOR not to exceed 15% of the annual carrying fee. The
Initial Funding of the GOR using this provision may be included in the cost of refinancing up to an
amount equal to 15% of the annual carrying fee.
G. Model Forms and Closing Documents. Use Handbook 4550.3, Existing Construction – Cooperative
Housing, Appendix III (modified for Section 223(f)). Cooperative Organizational forms and
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Refinancing Cooperative Housing Projects under
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17.4
Program Requirements – Technical Processing
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documents must be reviewed and approved for legal and programmatic compliance before the issuance
of a Firm Commitment. Use FHA Required Closing Instruments, FHA Form No. 3257-B, also set
forth in Handbook 4550.3, Appendix 3-10. (See Section 17.3.D.7 above). The Hub/PC will provide
the documents set forth in Handbook 4550.3.
17.4
Program Requirements – Technical Processing
A. Architectural and Cost Processing for Cooperatives. Follow the current instructions for Section 223(f).
A summary of these procedures is outlined below.
1. Architectural Analysis. Lender will submit and HUD will review deliverables as specified under
the present guidance for Section 223(f) to the Hub/PC.
2. Cost Processing. The HUD Cost Analyst will review lender exhibits as required in Chapter 5 and
will recommend either acceptance or rejection of the Cost portion of the Firm submission.
3. PCNA. The primary purpose of the PCNA for a Cooperative project is to assess the Capital Needs
of the project with the exception of any elements owned by the individual shareholders. So, it is
very important to ascertain exactly what items are the sole responsibilities of the Cooperative. In
some cases, appliances, kitchen cabinets, etc. may actually be owned by the Cooperative. The
interior of individual units are still inspected in the same manner as with apartments. Any hazards
or defects that would affect safety and marketability of the Cooperative should be noted even if it
is an individual shareholder’s responsibility. These items must be corrected at the shareholder’s
expense prior to endorsement. Mortgage proceeds must only be used for repairs of property
owned by the Cooperative.
B. Valuation Processing - Appraisal Scope-of-Work for Cooperatives. There can be great variation in
how a Cooperative is structured. According to the USPAP, the determination of Scope-of-Work is an
ongoing process in an assignment. Information or conditions discovered during the course of an
assignment may cause the appraiser to reconsider the scope-of-work. Therefore, the guidance set forth
below may be modified on a case-by-case basis to assure compliance with USPAP and that the results
of the appraisal assignment will be reliable for making underwriting decisions. There are four major
elements for the appraisal assignment: General Requirements, Valuation as a Market Rate Rental
Project, Market Analysis for Continued Use as a Cooperative, and Hypothetical Gross Sell-Out Value
as a Cooperative.
1. General Requirements.
a. Selection of the Appraiser. The lender must select a qualified Appraiser in accordance with
Chapter 7. It should be noted that the appraisal of a Cooperative is very specialized. Lenders
should base their selection of an Appraiser on their experience for this type of assignment and
upon their familiarity with the subject’s market area.
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Program Requirements – Technical Processing
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b. Value Definition. Appraisers must use the following definition published by Federal
Regulatory agencies:
“Market value means the most probable price which a property should bring in a competitive
and open market under all conditions requisite to a fair sale, the buyer and seller each acting
prudently and knowledgeably, and assuming the price is not affected by undue stimulus.
Implicit in this definition is the consummation of a sale as of a specified date and the passing
of title from seller to buyer under conditions whereby:
(1) buyer and seller are typically motivated;
(2) both parties are well informed or well advised and acting in what they consider their own
best interests;
(3) a reasonable time is allowed for exposure in the open market;
(4) payment is made in cash or by financial arrangements comparable thereto; and
(5) the price represents the normal consideration for the property sold unaffected by special or
creative financing or sales concessions granted by anyone associated with the sale.”
The value shall be estimated assuming that all repairs have been completed as of the date of the
appraisal.
c. Inspection of the Subject and Comparables. The primary appraiser designated by the lender
and accepted by HUD must physically inspect the subject (both exterior and interior) and all of
the comparables used as part of the analysis and must sign the Certification within the appraisal
report and the supporting HUD forms.
(1) The primary appraiser must inspect at least one of each bedroom/unit type. The total
number of units inspected must equal or exceed 5% of the total number of units for projects
of up to 200 units, or 4% of the total number of units/beds for projects greater than 200
units. If the characteristics and/or condition of the subject indicate that a higher level of
inspection is necessary, it is the appraiser's responsibility to expand the scope of the work
as is necessitated by the observations made by the primary appraiser during the inspection
of the subject. This is especially important where the improvements are high-rise
structures whereby individual units within demonstrate varying degrees of light and view
qualities. If there are hazardous conditions or other factors that preclude a thorough
inspection of the interior, the appraiser must clearly indicate these circumstances in the
appraisal report.
(2) Large Projects. For projects exceeding 500 units, the appraiser must consult with the
processing office to agree on a reasonable number of units to be inspected. In addition, the
appraiser may employ assistants to inspect individual units. The purpose of allowing
assistants is to encourage a thorough inspection. The names and qualifications of these
assistants must be disclosed in the appraisal report but they are not required to sign the
report.
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d.
e.
f.
g.
Chapter 17
Refinancing Cooperative Housing Projects under
Section 207 pursuant to Section 223(f)
17.4
Program Requirements – Technical Processing
Chapter Index / Section Index
Document page 515
(3) The primary appraiser must inspect all of the comparables used in deriving an estimate of
value, including land comparables (if applicable), improved comparables sales, expense
comparables and rental comparables. The appraiser must verify the condition of the
comparables at the time of transfer/rental with management or other personnel familiar
with the property. Contact information must be documented in the appraisal report.
Required Appraisal Report Exhibits. In accordance with the requirements of Chapter 7 and the
programmatic requirements of Section 223(f).
Review of the PCNA and Phase I ESA. The appraiser must review the PCNA and ESA prior
to completing the assignment, comment on any remarkable findings and their impact (if any)
on value.
Required Approaches.
In accordance with the requirements of Chapter 7 and the
programmatic requirements of Section 223(f).
Estimation of Remaining Economic Life (REL). In accordance with the requirements of
Chapter 7 and the programmatic requirements of Section 223(f).
h. HUD Forms. All of the usual forms for Section 223(f) should be employed, (92264, 92264-A,
92273 and 92274) following the outstanding instructions for Section 223(f). The Form HUD92264 shall be completed based on usage as rental apartments. The Gross Sell-Out Value
should be summarized in Section “O”; (Remarks).
i. Additional Appraisal Work Required by the lender or other Intended Users. The appraiser is
bound by USPAP to complete the appraisal assignment in compliance with the requirements of
the person or entity who ordered the report and to satisfy the needs of identified intended users.
j. Reconciliation and Conclusion. The appraiser must briefly reconcile the information
presented; clearly indicating what data is the most relevant and supports the report’s
conclusions. The conclusions must indicate whether or not the subject can expect to enjoy
long-term use as a Cooperative; and whether or not the proposed maintenance fee is within
market limits and is affordable for the typical shareholder.
k. Report Content and Format. In accordance with the requirements of Chapter 7.
2. Valuation as a Market Rate Rental Project. Follow all current procedures in Chapter 7 for Section
223(f) Appraisal and Appraisal Review, including these additional instructions:
a. Use of the Subject. The appraiser shall assume a hypothetical use of the subject as a market
rate rental project, except that income from any units subject to rent control will assume the
current controlled rental amount.
b. Estimate of Effective Gross Income. The estimate of Effective Gross Income shall be made
using market rental housing comparables that are equivalent to the subject in location, size and
style. Actual rents should be used for any rented units in the Cooperative that are subject to
rent control. Market rents must be used for any subsidized units. Vacancy and collection
losses should also be market derived, but in no event will a residential occupancy rate greater
than 93% and a commercial occupancy rate greater than 80% be used.
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Refinancing Cooperative Housing Projects under
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17.4
Program Requirements – Technical Processing
Chapter Index / Section Index
Document page 516
c. Expense Analysis. The Expense analysis should accurately reflect usage as a market rate rental
project. Appropriate weight should be given to the most recent three year history for items such
as repairs, maintenance and common utilities. Other items such as taxes and management
expense should be based on rental apartment market data.
3. Market Analysis for Continued Use as a Cooperative. The appraisal report must also contain a
Level C Market Analysis of the local market with an emphasis on Cooperatives. The purpose of
the analysis is to determine the ability of the subject to continue usage as a Cooperative Housing
project. The detailed requirements for performing a Level C analysis can be found in “Market
Analysis for Real Estate”, published by the Appraisal Institute. The study must also address these
additional requirements.
a. Assumptions. The study should assume that management has budgeting and operations under
control; which can be demonstrated by an illustration of past years maintenance charge history.
b. Financial Statement Review. Special Assessments should be explained, and a review of the
last three years financial statements is required. (See Section 17.3.D.4 above for specifications
for financial statements). The footnotes to the Cooperative’s yearly financial statement are a
typical source of details regarding past, current and upcoming issues. There should be a
discussion of any material or atypical items as to their impact on value. In addition, the
appraiser will complete a Form HUD-92274 using comparable Cooperative projects and also
analyze the past three years records and any unaudited records from the most current period, if
deemed reliable, to ascertain if the proposed maintenance charge is adequate to continue
operations.
c. Cost of Occupancy/Cost of Ownership Analysis. The typical monthly maintenance charge by
unit type should be compared to the competing project’s monthly maintenance charges by unit
type and will serve as a variable for Cost-of-Occupancy/Cost-of-Ownership calculations to
ascertain and support market-oriented unit pricing. The appraiser will complete a Form HUD92273 for each major Cooperative unit type using other units from other Cooperative projects
as comparables to compare monthly maintenance fees and to determine if the proposed
monthly fee is realistic and affordable for the subject’s market area.
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Refinancing Cooperative Housing Projects under
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17.4
Program Requirements – Technical Processing
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Chapter Index / Section Index
4. Hypothetical Gross Sell-Out Value as a Cooperative. The appraiser will develop a value estimate
based on a Gross Sell-Out of all units, using comparable sales analysis and any other industry
acceptable methods, before the application of all costs and entrepreneurial profit associated with a
conversion from a rental property to a cooperatively owned property and further assuming a vacant
and moderately renovated unit. Additionally, this value is over and above a pro rata share of an
underlying mortgage encumbering the premises. Based on the proposed mortgage refinancing, it is
considered that such debt conforms to the influencing market parameters. A sample breakdown of
the Gross Sell-Out Value is as follows:
Gross Sell-Out Value:
Gross Sell-Out for Residential
Units (453 Rooms x $48,000/Rm)
Unpaid Balance of Underlying
Mortgage
Total Gross Sell-Out Value and
Underlying Mortgage
Rounded
$21,744,000
$2,858,300
$24,602,300
$24,600,000
5. Appraisal Review. HUD Multifamily Staff Appraisers will review the appraisal in accordance
with USPAP Standard 3. The appraisal review must include a comparison of the subject’s
proposed monthly maintenance fees based on the new financing to what the various units would
rent for if the subject were operated as a rental project. A Cooperative Housing project’s
feasibility for continued use as a Cooperative is questionable if monthly maintenance fees
significantly exceed what units could actually rent for. A downward trend in rents versus no
change or an upward trend in maintenance fees is an indication of an unhealthy Cooperative
Housing project/market.
C. Environmental Processing. The HUD Review Appraiser will follow all applicable instructions in
Chapter 9.
D. Mortgage Credit Processing. Follow the current procedures in Chapter 8 for Section 223(f) modified
as follows:
1. Determination of the Acceptability of the Cooperative Corporation.
a. BOD Performance History. In processing an application, the lender will take into account the
BOD’s ability and willingness to manage the Cooperative within the requirements of Section
223(f). The lender will also consider all applicable requirements contained in Chapter 10,
Management Analysis.
b. Ability to Close. It must be determined that the Cooperative organization has the ability to
close the transaction in a satisfactory manner and that the sum of the monthly charges to
members will be adequate to meet debt service and other ownership expense. It must also be
determined that the present members of the Cooperative, as a group, have the ability to provide
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Refinancing Cooperative Housing Projects under
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17.4
Program Requirements – Technical Processing
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Chapter Index / Section Index
whatever additional funds may be required to close the transaction.
c. Credit-Worthiness. It must also be determined that participants have not been debarred or
subject to a Limited Denial of Participation, and are otherwise capable of meeting their
ownership and management obligations. For the Single Asset Borrower Entity, its Officers and
BOD Members, and the Management Agent, the review should include the following
documents:
•
HUD-92013 SUPPLEMENT
•
HUD-2530 / APPS Clearance (or successor form)
• Verification of Deposits
d. Other Business Concerns. List of other business concerns, are required for the Officers of the
BOD.
e. Adequacy of Monthly/Annual Charges. The underwriter must ensure that the sum of monthly
charges, as listed on Cooperative Membership Exhibit, converted to an annual basis, is
sufficient to meet the HUD estimate of debt service, Cooperative operating expenses, taxes,
special assessments and ground rents, if any, plus a general operating reserve of 3% of these
items. In making these determinations of allowances for accessory income (if any), the
allowance shall not exceed the Cooperative's estimate or the appraiser’s estimate of accessory
income, whichever is the lesser. However, rental payables under duly executed acceptable
leases for commercial space on the premises shall be used in lieu of estimates. These payables
should be totaled to be sure all members have assurance that the total membership has their
required minimum equity requirements. The HUD estimate of annual charges will include the
following:
•
Debt service payments.
•
Cooperative Operating Expenses, Reserve for Replacements, Taxes, Special
Assessments and Ground Rent, if any.
(Memorandum attached to Form HUD-92264). General Operating Reserve of 3% of
Sum of Above.
f. Review of the Cooperative’s Procedure for Approving New Members. The procedures
employed by the Cooperative in approving new members (cooperators) should be reviewed to
ascertain if there is compliance with any income requirements and credit scores as contained in
the Cooperative’s bylaws or other related agreements. Individual files for anyone becoming a
member in the three month period immediately prior to the date the application for Firm
Commitment was submitted must also be reviewed by the HUD processing office.
g. Maintenance Charges. The Hub/PC must review the procedures employed by the Cooperative
in reviewing its budget, determining the adequacy of the carrying charge and to its history of
carrying charge increases. The Cooperative’s Bylaws or other appropriate organizational
documents must contain a provision that requires an annual increase in the carrying charge
based on inflation, in order to address increases in operating expenses. The total amount of the
•
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Chapter 17
Refinancing Cooperative Housing Projects under
Section 207 pursuant to Section 223(f)
17.5 Program Requirements – Issuance of Firm
Commitment and Loan Closing
Chapter Index / Section Index
Document page 519
unpaid balance (30 days or more) for carrying charges and special assessments as shown in the
rent roll must not exceed 5% of the gross annual income.
2. Determination of Total Debt Service, Cooperative Operating Expense and GOR. Total Debt
Service will be calculated by multiplying the amount of the mortgage by the sum of initial curtail
rate, interest rate and MIP. Cooperative Operating Expense includes those operating expenses,
reserve for replacements, taxes, special assessments and ground rents, if any, which are the
responsibility of the Cooperative membership as a whole rather than of the individual members
and will include the cost of occupancy of the units assigned to employee use. The GOR is 3% of
the sum of the annual charges described above, and is accumulated as a special reserve in order to
meet possible contingencies.
3. Outstanding Debt. Past due accounts payable and outstanding project liabilities must be cleared
and released, or otherwise fully satisfied, prior to or at loan closing. Examples of such items
include deferred management fees, overdue utility bills or real estate taxes, or trade payables.
These items are not to be included in the eligible debt basis.
4. Completion of the Form HUD-92264-A and Determining the Maximum Insurable Mortgage.
Pages 1-2 of the form HUD-92264-A shall be completed according to existing instructions,
modified as noted in Section 17.3.A.
E. Asset Management Processing. The application must include the applicants' management plan,
including training requirements, and a description of maintenance procedures and management of the
Reserve for Replacement funding and work items.
17.5
Program Requirements – Issuance of Firm Commitment and Loan
Closing
Follow Section 223(f) closing procedures in the Multifamily Closing Guide and contact the Hub/PC for
the FHA Required Closing Instruments, FHA Form No. 3257-B, set forth in Handbook 4550.3, Appendix
3-10.
NOTE: The MAP Forms contained in this Appendix that are used by lenders and by HUD processing
staff will be updated, revised and reissued in a Housing Notice after the Department has completed
work that is currently underway to streamline application processing and program requirements. The
Forms are otherwise unchanged.
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18.1
Chapter 18
Section 223(a)(7)
Purpose of Section 223(a)(7)
Document page 520
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Chapter 18
Section 223(a)(7)
18.1
Purpose of Section 223(a)(7)
Section 223(a)(7) of the National Housing Act (NHA) permits refinancing of HUD-insured multifamily
projects. Refinancing results in prepayment of the existing mortgage, endorsement of a new mortgage and
assignment of a new project number. Refinancing through Section 223(a)(7) typically reduces project
debt service and increases cash flow by lowering the interest rate of the mortgage and/or by extending the
amortization period. The increased project cash flow benefits properties and owners and reduces risk to
the FHA Insurance Fund.
Section 223(a)(7) is applicable only to certain mortgages currently insured by FHA, as described below,
and to HUD-held loans on projects subject to the Multifamily Assisted Housing Reform and Affordability
Act of 1997 (MAHRA). A mortgage refinanced pursuant to Section 223(a)(7) is insured under the same
section of the NHA as was the mortgage originally insured under that section of the act, for example,
Section 221(d)(4) or Section 223(f).
Section 223(a)(7) refinancing is limited to existing properties in residential use, and cannot include new
construction or expansion of the height or footprint of an existing building, or any repairs which involve
ground disturbance. Proceeds may be used to fund (a) the payoff of existing FHA-recognized
indebtedness (b) the cost of refinancing, (c) the cost of critical and non-critical repairs (as described in the
required Capital Needs Assessment, subject to the cost limits as described in Chapter 5.1.C.1 and 5.10.B),
and (d) deposits to reserve for replacement accounts. By statute, equity take-outs are not permitted under
Section 223(a)(7).
18.2
Consolidation of applicable guidance
This Chapter provides guidance on processing Section 223(a)(7) refinancing transactions for all currently
insured multifamily properties. Programs administered by the Office of Healthcare Programs are not
covered by this Chapter.
This Chapter consolidates portions of previously issued guidance and incorporates new guidance and
practices. This Chapter updates and clarifies past guidance replacing applicable portions of the following
documents:
•
Handbook 4567.1, Refinancing of Insured Multifamily Projects Pursuant to Section 223(a)(7),
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18.3
Chapter 18
Section 223(a)(7)
Basic Program Requirements
Document page 521
Chapter Index / Section Index
•
Housing Notice 93-89, Expedited Section 223(a)(7) Processing Instructions,
•
Mortgagee Letter 94-17, Refinancing of Insured Mortgages Pursuant to Section 223(a)(7) of the
National Housing Act – Questions and Answers, and
•
Mortgagee Letter 2006-03, Refinancing of FHA Insured Multifamily Project Mortgages Pursuant
to Section 223(a)(7)
18.3
Basic Program Requirements
Standard Processing Time. In general Section 223(a)(7) transactions should be processed expeditiously
to reach a Firm Commitment decision within 30 calendar days of receipt of a complete application.
A. Eligibility. These instructions apply to the refinancing of multifamily properties with full insurance
mortgages and previously coinsured mortgages converted to full insurance. Mortgages excluded from
these instructions are:
1. risk share mortgages,
2. co-insured mortgages, and
3. Section 202 loans and other HUD-held mortgages (other than those subject to a debt restructuring
under the Multifamily Assisted Housing Reform and Affordability Act (MAHRA)).
B. Maximum mortgage (Form HUD-92264-A apply Criteria 1, 2, 5, & 10). The mortgage may not
exceed the lowest of the following:
1. Criterion 1 - Amount that is lower than the lowest of the amounts derived in paragraphs 2., 3., and
4., of this Section B below.
2. Criterion 2 modify to read the “Original principal amount of the existing insured mortgage” that is
to be refinanced (or the sum of the original principal amount of all mortgages to be refinanced if
two or more mortgages on one single property are being refinanced).
3. Criterion 10 - Amount based on the cost to refinance the existing insured mortgage and other
permitted debt, permitted repairs, capital improvements, and loan closing charges. The unpaid
principal balance of the existing insured mortgage (or mortgages if more than a single mortgage
are being refinanced), plus a., b. and c. below:
a. Loan closing charges, including the application fee, upfront Mortgage Insurance Premium
(MIP), financing fee, total costs of prepayment penalties associated with the mortgage note,
title and recording fees, and legal fees associated with the refinancing, and required deposits to
the reserve for replacements.
(1) The allowable application fee is the amount anticipated to be paid net of any post-closing
refund.
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18.3
Chapter 18
Section 223(a)(7)
Basic Program Requirements
Document page 522
(2) The cost of defeasance of any existing bond issue and bond discounts exceeding 10% of
the proposed mortgage amount may not be included.
(3) Discounts. The cost of any discounts may not be included in estimating the maximum
mortgage amount.
b.Outstanding debt incurred in connection with capital improvements made to the property that
are acceptable to the Regional or Satellite Office.
Indebtedness incurred in connection with funding operating deficits, deferred management fees
or other non-capital costs (other than Section 223(d) loans) are not eligible for inclusion in
calculating the maximum mortgage amount available for refinancing under Section 223(a)(7)
nor are past-due payables. See Section 8.5.B.7 for a discussion of clearing or resolving pastdue payables at the time of closing.
c. HUD-approved Critical and Non-critical repairs costs.
For a discussion of permitted repairs, please see Chapter 5.1.C.1., Eligible Construction
Activities by Program, and Chapter 5.10.B., Processing for Refinance or Acquisition, Section
223(f) and 223(a)(7) and 241(a) for Repairs and Alterations.
(1) Generally, Critical repairs must be completed prior to endorsement. See Chapter 5.1.J.,
Maximum Time for Completion of Repairs.
(2) Non-critical repairs may be deferred but should be completed within twelve months of
endorsement. Generally a 10% escrow will be established, which may be funded with a
letter of credit. For further discussion, see Chapter 5.1.L., Funding Repairs, Escrow
Agreement for Deferred Repairs. HUD may determine that a larger escrow is appropriate
for projects with more extensive repairs, or may waive the escrow for very minor
replacement cost items.
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Chapter 18
Section 223(a)(7)
Basic Program Requirements
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4. Criterion 5 - Amount based on debt service ratio. The amount that can be amortized by the
applicable percentage described below of the project's estimated net operating income. The
mortgage may exceed this amount by capitalizing the savings from any tax abatement that runs
with the land. Physical occupancy assumptions used in calculating the project’s estimated net
operating income should be based on historical occupancy levels.
Rent Structure
Minimum Debt
Service Coverage
Ratio (DSCR)
Projects with >90% of
units assisted by ProjectBased Section 8, and
Cooperative Housing
insured under Section 213
All other projects
Form 92264A Criterion 5 loan
ratio
1.05
95.0%
1.11
90.0%
C. Mortgage term. The term of a new mortgage insured pursuant to Section 223(a)(7) may be extended
up to 12 years beyond the maturity date of the existing, originally insured mortgage . The term cannot
be extended beyond 75% of the remaining useful life of the project or the maximum term permitted in
the section of the act under which the existing mortgage is insured. If the existing mortgage is the
result of a previous refinancing through Section 223(a)(7), the longest allowable maturity date of the
new mortgage is 12 years beyond the maturity date of the mortgage originally insured under the FHA
insurance program but not to exceed 75% of remaining useful life.
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Chapter 18
Section 223(a)(7)
Basic Program Requirements
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Example of allowable term/maturity date extensions
for a Section 223(a)(7) refinancing
of a mortgage currently insured under Section 223(f)
Assumptions
Current loan program
Section 223(f)
Maximum permitted term under the applicable program
35 years
Assumed amortization start date
January 1, 2000
Examples of permitted term/maturity extensions for loans of different initial terms
Maturity date
(original term)
New maximum maturity date if
refinanced under 223(a)(7) on
January 1, 2010
New maximum maturity date if
refinanced for a second time
under 223(a)(7) on January 1,
2013
Example 1
January 1, 2035
(35 years)
January 1, 2045
(any later maturity would violate
the maximum 35-year term limit
under the applicable SOA, in this
case 223(f))
January 1, 2047
(any later maturity would violate
the maximum 12-year extension
of the original mortgage’s term)
Example 2
January 1, 2030
(30 years)
January 1, 2040
(any later maturity would exceed
the 30-year term of the original
mortgage)
January 1, 2042
(any later maturity would violate
the maximum 12-year extension
of the original mortgage’s term)
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Section 223(a)(7)
Basic Program Requirements
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Example of allowable term/maturity date extensions
for a Section 223(a)(7) refinancing
of a mortgage previously insured under Section 221(d)(4)
Assumptions:
Original loan program
Section 221(d)(4)
Maximum permitted term under the 221(d)(4) program
40 years
Assumed amortization start date of the Original 221(d)(4) loan January 1, 2000
Current loan program (see Example 3 and Example 4 below)
Section 221(d)(4)
Section 223(f)
or
Examples of permitted term/maturity extensions for loans with different refinancing
histories
Maturity date
(original term) as
a Section
221(d)(4) project
Example 3
A (d)(4) loan
is refi’d with
a 223(f), and
that is refi’d
with an (a)(7)
Example 4
The
same
(d)(4)
loan
above is not
refi’d with a
223(f) loan,
but is refi’d
with an (a)(7)
New maximum maturity date if
refinanced under 223(f) on
January 1, 2010
New maximum maturity date if
refinanced under 223(a)(7) on
January 1, 2013
January 1, 2040
(40 years)
January 1, 2045
(the maximum 35-year term limit
under the applicable SOA, in this
case 223(f))
January 1, 2048
(any later maturity would violate
the maximum 35-year term limit
under the applicable SOA, in
this case 223(f))
January 1, 2040
(40 years)
Not Applicable for this example
January 1, 2052
(any later maturity would violate
the maximum 12-year extension
of the original mortgage’s term)
(No 223(f) refinancing on this
date)
If two or more existing FHA-insured multifamily loans (for a single property) are to be refinanced into
a single Section 223(a)(7) loan, the term of the new Section 223(a)(7) mortgage may not exceed 12
years beyond the maturity date of the earliest-to-mature originally insured mortgage.
Any extension of the new mortgage term beyond the remaining term of the existing mortgage may not
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Basic Program Requirements
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result in a mortgage term that exceeds 75% of the remaining useful life of the property.
D. Mortgage Insurance Premium. At endorsement, the borrower must pay an upfront MIP of ½ percent
(0.50%) of the mortgage amount or as subsequently revised in a Federal Register note. The mortgagee
of record must submit Form HUD-9807, Request for Termination of Multifamily Mortgage Insurance,
to obtain a refund for the borrower of a portion of the MIP paid pursuant to the original mortgage.
E. Environmental review requirements.
1. A Phase I Environmental Site Assessment is not required. Pursuant to 24 CFR 50.19(a)(21), there
are no environmental review requirements and the form HUD 4128 “Environmental Assessment
and Compliance Findings for the Related Laws” does not have to be filled out. Transactions that
require repairs in excess of routine maintenance are not appropriate for processing under Section
223(a)(7). (See Chapter 9.1 Subsection A, paragraph 5.)
2. Flood insurance. The lender must determine if the property is located in a special flood hazard
area (based upon the most recent Flood Hazard Map) per Section 9.5.E.1. If the site is determined
to be in such an area, the borrower must obtain and maintain Flood Insurance coverage for the
duration of the mortgage.
F. Fees.
1. Application fee - The non-refundable application fee paid to HUD is 15 basis points.
2. Maximum fees – Lenders may charge financing fees that may not exceed the amounts below. Fees
may be increased for bond transactions to cover fees associated with costs of issuance. Legal fees
paid by the lender are not included in Lender Fees for purposes of the calculations below.
Maximum Lender
Fees
(not bond transactions)
New Loan Amount
Maximum Lender
Fees
(bond transactions)
Portion of loan amount
above $2,000,000
2.00%
4.00%
Loan amount up to
$2,000,000
3.50%
5.50%
3. Inspection fee - There is no inspection fee even if there are deferred non-critical repairs.
G. Project Numbering. Projects will be assigned the next FHA number under the same Section of the Act
under which the project was originally insured.
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18.3
Chapter 18
Section 223(a)(7)
Basic Program Requirements
Document page 527
H. Regulatory Agreement. A new Regulatory Agreement must be executed at closing under the same
Section of the Act as the original loan (including modifying the principal(s) in provision 50).
Amending and restating the existing Regulatory Agreement is not permitted.
I. Cost Certification. Cost certification is not required. As a condition of the Firm Commitment, HUD
may require the borrower to produce information related to the cost and completion of Critical and
Non-critical repairs and to provide appropriate documentation to HUD, including, at a minimum,
invoices, receipts and photos, as repair funds are drawn from escrows. The need for site visits in
connection with the completion of repairs or escrow draws will be determined by the Hub Regional or
Satellite Director of the HUD office with jurisdiction over the property. Projects with minor repairs
typically would require few, if any, site visits by HUD staff.
J. Commencement of Amortization. Amortization will begin on the first day of the second month
following the date of the initial/final endorsement of the mortgage note.
K. Source of Funds for Prepayment Penalty Costs.
a. Prepayment penalty costs are, as discussed in 18.3.B.2.a., eligible mortgageable costs. The amount
of the cost that is not supported by the mortgage must be paid from other sources.
b. The one exception to the general prohibition that lenders may not pay or otherwise provide funds
for borrower costs is that in 223(a)(7) transactions lenders may pay prepayment penalty costs.
c. The lender’s application must include an estimated Sources and Uses statement specifying the
amount of any lender fees or profit used to pay prepayment penalty costs and if the total
prepayment penalty costs associated with the mortgage note(s) to be repaid exceed such amount,
the amount of prepayment penalty costs to be paid from other sources, specifying such source(s).
d. The amounts of lender fees or profit and borrower or other funds used to pay prepayment penalties
should be shown as sources in the project’s Sources and Uses statement
e. The lender cannot pay, either directly or indirectly, for repairs or costs other than Prepayment
penalty as noted above. The source of funds for repairs and transactions costs must be accounted
for separately in the project’s Sources and Uses statement.
L. Refinancing Partial Payment of Claim (PPC) Properties. A recast first mortgage loan and an
associated Partial Payment of Claim second mortgage may both be refinanced in a Section 223(a)(7)
transaction so long as the new loan amount does not exceed the original principal amount (i.e., the
original pre-Mark to Market or PPC restructuring loan mount) and it is clear the market or project
conditions have improved to the point there is little risk the new loan will default.
1. HUD will require that the HUD-held second mortgage be (1) paid off in full or partially paid off;
and (2) subordinated and remain secured. If partially paid off or remains unpaid, HUD will
MAP Guide, January 2016
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Bookmarked version, r 1.1, page 527 of 534
Chapter Title:
Subsection Designation:
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Chapter Index / Section Index
Chapter 18
Section 223(a)(7)
18.4
Processing
Document page 528
maintain the surplus cash split of 25% to owner and 75% to pay down the HUD-held second
(statutory under MAHRA). Pursuant to the owner paying down (or paying off) the HUD second
mortgage with available loan proceeds, mortgage proceeds must first be allocated to fund the
reserve for replacement account (in the amount required by the CNA) and make needed repairs to
assure the ongoing value and viability of the asset. HUD will consider modifying the required 2575% split, on a case by case basis (subject to MAHRA constraints) where debt service savings will
allow.
2. Upon refinance, debt service payments will not exceed what is currently in place. Since these
properties have previously undergone a PPC, HUD would not want them encumbered with
additional debt which could negatively affect future financial stability. Consequently, the interest
rate on the new mortgage must be competitive enough such that substantive savings in debt service
payments will result.
3. The debt service coverage rate of 1.2 will be required to account for the additional risk inherent
with a former PPC.
Processing of such a transaction would follow the same procedure as that of other multiple mortgages
permitted to be wrapped into a single 223(a)(7) refinance transaction. HUD regional or satellite office
production staff should solicit particular input from asset management staff on these transactions.
M. Commitment, Regulatory Agreement and Closing.
1. Commitment. The commitment should be in letter form listing the: a) commitment amount, b) the
Section of the Act with any appropriate further reference, e.g., 223(a)(7) pursuant to 221(d)(4), c)
loan terms and requirements, d) any required repairs, e) the requirement for executing a new
Regulatory Agreement, f) the requirement that the owner notify OAMPO when any repairs
deferred until after endorsement are underway and/or completed, and g) any Special Conditions.
2. The commitment is valid for a period of 90 days. It is not anticipated that extensions will be
necessary in a Section 223(a)(7) refinancing. However, the Hub or PC Director may extend
Section 223(a)(7) commitments for a maximum of three additional 30-day periods, provided that
processing and underwriting conclusions are updated as necessary so they are current at the time of
any extension.
3. The commitment must require that the existing Reserve for Replacements be transferred in total to
the new mortgage, and specify the dollar amount of funds to be transferred and the amount of
additional replacement deposits.
4. Closing. Loans shall be closed in accordance with the Closing Guide, available at
http://portal.hud.gov/hudportal/documents/huddoc?id=14_MF_CLSNG_GD.PDF.
MAP Guide, January 2016
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Chapter Index / Section Index
Bookmarked version, r 1.1, page 528 of 534
Chapter Title:
Subsection Designation:
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18.4
Chapter Index / Section Index
Chapter 18
Section 223(a)(7)
18.4
Processing
Document page 529
Processing
A. Eligible Section 223(a)(7) applications submitted by lenders approved to submit MAP applications
must be processed under MAP. See Chapter 2.7.D for additional guidance.
B. Project Analysis. Lenders must provide an analysis with their applications which provides details
about the sizing of the Section 223(a)(7) mortgage consistent with this guidance and a Sources and
Uses statement consistent with such mortgage sizing calculations. The following may serve as an
example of the content and presentation of a submitted Project Analysis:
MAP Guide, January 2016
Go to
Chapter Index / Section Index
Bookmarked version, r 1.1, page 529 of 534
Chapter Title:
Chapter 18
Section 223(a)(7)
18.4
Processing
Subsection Designation:
Go to
Document page 530
Chapter Index / Section Index
The following is an example of a sample transaction – the data shown is for illustration purposes
only
Section 223(a)(7) - Project Analysis - Mortgage Sizing and Sources and Uses Worksheet
To complete the worksheet, fill in only the blue cells.
Project Name
Project City, ST
Lender
I.
Project #
Name of Mortgagor
Oak Tree Manor Apartments
Springfield, MO
FHA Capital Mortgage, Inc.
Lowest Mortgage Amount of criteria
$ 4,800,000
Page 1
123-45678
Oak Tree Manor LP
Requested Amount = Lower Mtg by Choice
This is a manual input usually equal to the lowest of the three amounts below:
1. Mortgage or Loan Amount Requested in Application
Difference vs. request
$ 4,800,000
2. Original Principal Amount of Mortgage(s) to be refinanced
$200,000
$ 5,000,000
Middle
5. Criterion 5. Amount Based on Debt Service Ratio (see calculation 5. details below)
$1,255,700
$ 6,055,700
Highest
$1,500
$ 4,801,500
Lowest
10. Criterion 10. Amount Based on the cost of refinancing (see calculation 10. details below)
II. Total Requirements for Settlement
Uses - Mortgageable Amounts
Current Unpaid Principal Balance of Existing Debt
Total Prepayment Penalty Costs
HUD approved debt to refinance via the A7
Critical repairs
Non critical repairs
Initial deposit to Reserve for Replacements
Fees
Financing fees (excluding Title&Rec., Leg&Org.)*
Title & Recording
Legal & organizational
Other permitted costs
$
$
$
$
$
$
$
$
$
$
$
4,570,638
137,119
25,000
10,000
12,000
112,800
19,000
4,000
-
(a). Total Mortgageable Uses of Cash
$
4,890,557
$
$
$
$
$
$
4,800,000
48,000
41,000
4,889,000
Cash Requirement Calculation
(c)=(a)-(b). Mortgageable Uses of cash less Sources
$
(d). Non-mortgageable: Assurance of Completion Escrow$
(e)=(c)+(d). Total Cash required
$
1,557
2,000
3,557
Sources
FHA Mortgage Amount
Discount
Lender paid prepayment penalty costs
Grants & other sources to pay costs + de min lndr R4R de
Purchased and Transferred Reserves
(b). Total Sources of Cash
III. Payback* calculations & change in interest rate and maturity date
P&I/mo.
$26,443
Refi'd Debt***
New Mortgage
$21,979
$4,464
P&I savings (monthly)
Annual P&I savings
$53,565
Note: net proceeds to pay borrower costs:
$
Transaction costs**
Divided by Annual P&I savings
Equals Payback Period (in years)
New 223(a)(7) interest rate:
Old interest rate:
Interest Rate reduction:
Maturity extension (yrs.):
4,848,000
$272,919
$53,565
5.1
4.250%
5.375%
1.125%
7.3
Fin. Fees, pre-pmt
penalties, T&R,
and legal fees.
* Payback period for is information only; it is not a program requirement. ** Includes incremental costs to third parties not incurred or incurrable under existing operation.
Chapter 18 - Section 223(a)(7) Project Analysis example
Example derived from:
Section 223a7 Mortgage Sizing and Sources and Uses worksheet 9-24-15.xlsx
The following is an example of a sample transaction – the data shown is for illustration purposes
only
MAP Guide, January 2016
Go to
Chapter Index / Section Index
Bookmarked version, r 1.1, page 530 of 534
Chapter Title:
Chapter 18
Section 223(a)(7)
18.4
Processing
Subsection Designation:
Chapter Index / Section Index
Document page 531
Section 223(a)(7) - Project Analysis - Mortgage Sizing and Sources and Uses Worksheet
Project #
Oak Tree Manor Apartments
123-45678
Name of Mortgagor
Springfield, MO
Oak Tree Manor LP
Page 2
Go to
Project Name
Project City, ST
Lender
FHA Capital Mortgage, Inc.
5. Amount Based on Debt Service Ratio
a. Mortgage Interest Rate
b. Mortgage Insurance Premium Rate
c. Initial Curtail Rate
@ term assumed (mos.)
420
d. Sum of Above Rates
e. Net Income
$ 400,000 X
f. Annual Ground Rent
+ Annual Spec. Assmt.
g. Line e minus line f
h. Line g divided by line d
i. Annual Tax Abatement
divided by
j. Line h plus line I
4.250000%
0.450000%
1.244728%
5.944728%
$360,000
90.0%
$360,000
$6,055,700
$6,055,700
Note: roundi ng down a mount:
$86
10. Amount Based on Existing Indebtedness, Repairs, and Loan Closing Charges*
Refi'd Debt***
$5,000,000 FHA #
Interest Rate Amort. Start date
Amount included for
To Calc max mortgage based on cost, follow the steps below:
(calc'd % Mortgage sizing
First, list known costs:
Current Unpaid Principal Balance of Existing Debt
$ 4,570,638 100.0% $
4,570,638
Total Prepayment Penalty Costs
$
137,119 3.0%
Prepmt pnlty pd by lender
$
48,000 Prepmt pd from loan proceeds (calc't'd):
$89,119
De min. R4R dep by lender
$
-
Ttl. borrower costs pd by lend $
123-45678
Maturity date
5.375%
6/1/2008
6/1/2043
Maturity-yrs.
Princ. Bal date
Rmng.Term-mos.
35.0
9/1/2015
Calc'd amort.
Calc'd bal.
333
-$429,362
8.6% Month of refi
$4,570,638
91.4%
Year of refi (truncated)
87
7
48,000
HUD approved debt to refinance via the A7
$
Amount required to pay off existing debt
Critical repairs
Non critical repairs
Initial deposit to Reserve for Replacements
Fees
Title & Recording
Legal & organizational
Other permitted costs
(a). Total known/fixed costs before other costs
List known non FHA-loan sources that offset costs:
Grants & other sources to pay costs
$
Purchased and Transferred Reserves
$
(b). Sum of known amounts to offset costs
(c)=(a)-(b). Total known costs less known offset sources
$4,707,757
$
$
$
$
$
$
$
$
$0 <-Mnthly P&I= $
$4,659,757
Note: Repairs Escrow calculations
25,000
$10,000
a. Non-critical repairs
10,000
20.0%
b. % escrow
12,000
$2,000
c. $ escrow
19,000
4,000
Note: Total knowns excluding payoff
$
70,000
4,729,757
41,000
$41,000
$4,688,757
Second, list unknowns, i.e., costs as %s of the final mortgage amount:
FHA MIP
0.45%
FHA exam
0.15%
Financing Fee
0.50%
Perm Placement fee
1.25%
Allowance extra
0.00%
Discount
0.00%
Total of unknowns %s
2.35%
(d). 1 minus % sum above is the gross up factor
97.65%
*** If a refi of a refi, describe original mortgage here:
Original Princ. Balance
Maturity date
Term Amort. start date
0
FHA #
$
$
97.65%
4,801,594
4,801,500
$
$
$
$
4,659,757
35,000
147,835
Third, apply gross up factor based on unknowns
(c)/(d). Calculated cost mortgage
Calculated cost mortgage rounded down
Int.Rate
Should be equal
The figures below recategorize the figures above to show a traditional cost mortgage breakdown:
a. Total Existing Indebtedness
b. Required Repairs
c. Other Fees
d. Loan Closing Charges ** (see details below)
e. Sum of line a through line d
f. Enter the Sum of any Grant/Loan and Reserves for Replacement and
Major Movable Equipment on Deposit
g. Line e minus line f (rounded down)
Note: roundi ng down a mount:
Chapter 18 - Section 223(a)(7) Project Analysis example
MAP Guide, January 2016
Go to
Example derived from:
Chapter Index / Section Index
$4,842,592
$41,000
$4,801,500
$92
consistency chk vs. M108 (should be $0)
$4,801,500
$0
Section 223a7 Mortgage Sizing and Sources and Uses worksheet 9-24-15.xlsx
Bookmarked version, r 1.1, page 531 of 534
Chapter Title:
Chapter 18
Section 223(a)(7)
18.4
Processing
Subsection Designation:
Go to
Document page 532
Chapter Index / Section Index
The following is an example of a sample transaction – the data shown is for illustration purposes
only
Project Name
Project City, ST
Lender
Section 223(a)(7) - Project Analysis - Mortgage Sizing and Sources and Uses Worksheet
Oak Tree Manor Apartments
123-45678
Project #
Springfield, MO
Oak Tree Manor LP
Name of Mortgagor
Page 3
FHA Capital Mortgage, Inc.
V. Condensed summary of Sources and Uses
Sources (summary)
New Section 223(a)(7) mortgage
Lender payment of all or a portion of
prepayment penalty
LOC - Borrower funding of non-mortgageable
Assurance of Completion escrow
$
4,800,000
$
48,000
$
2,000
Uses (summary)
Unpaid Principal Balance of existing
mortgage
Initial deposit to Reserve for
Replacements
Non-critical repairs
Prepayment Penalty (entire amount due)
Assurance of completion escrow (nonmortgageable)
Subtotal of selected Sources
All other Sources (i ncl udes tra ns ferred res erves ,
$
$ 4,570,638
$
$
12,000
10,000
$
137,119
$
2,000
4,850,000
Subtotal of selected Sources
All other Uses (i ncl udes fi n. fees & cos ts ,
$ 4,731,757
other refi 'd debt, repa i rs , di s cnts . & mi s c.)
$
contri buted ca s h & LOCs , + other tra de. prem.
$
40,557
Total Sources
$
4,890,557
Total Uses
158,800
$ 4,890,557
V. Financing Charge details for Cost Based Criterion 10. mortgage and the Actual mortgage
Note that the actual mortgage may be equal to the Cost Based Criterion Mortgage if this is the maximum permitted mortgage):
Fees for the Criterion 10 mortgage of
**
Fees based on the actual mortgage amount of
$ 4,801,500
*
Financing Charges based on fees shown as %s of the
$ 4,800,000
Financing Charges based on % above and certain "knowns"
mortgage amount listed in Section II, and certain "knowns"
per cost-based mortgage
FHA MIP
FHA exam
Financing Fee
Perm Placement fee
Allowance extra
Discount
Title Recording HUD
Legal & org
Initial dep to reserve
Total
calc't'd. per Criterion 10. above.
$
$
$
$
$
$
$
$
$
$
21,607
7,202
24,008
60,019
19,000
4,000
12,000
147,835
per actual mortgage
FHA MIP
FHA exam
Financing fees
Subtotal:
$
112,835
Financing Fee
Perm Placement fee
Allowance extra
Discount
Title Recording HUD
Legal & org
Initial dep to reserve
Total
VI. Details of prepayment penalty and sources of payment
Total Prepayment Costs to be paid
Total prepayment pnlty to be paid from mortgage proce
Total prepayment pnlty to be paid by lender
Any de minimus lender deposit into the Res. For Repl.
$
% of new actual mtg. amt.
$137,119
2.857%
$89,119
1.857%
$48,000
1.000%
$0
0.000%
Chapter 18 - Section 223(a)(7) Project Analysis example
Example derived from:
MAP Guide, January 2016
Go to
Chapter Index / Section Index
$
$
$
$
$
$
$
$
$
$
21,600
7,200
24,000
60,000
19,000
4,000
12,000
147,800
Financing fees
Subtotal:
$
112,800
Section 223a7 Mortgage Sizing and Sources and Uses worksheet 9-24-15.xlsx
Bookmarked version, r 1.1, page 532 of 534
Chapter Title:
Subsection Designation:
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Chapter Index / Section Index
Chapter 18
Section 223(a)(7)
18.4
Processing
Document page 533
C. Verification of existing borrower debt. The lender must verify the amount and terms, including
prepayment penalties and repayment terms, of existing insured mortgage debts and any other secured
or unsecured debt of the borrower.
1. The application should include a copy of the mortgage note and documents evidencing other
indebtedness.
2. The lender should compare the mortgage debt information submitted to the lender with
information in the project’s financial statements and the title search report. Any discrepancies
should be explained in writing by the owner. Since the owner is prohibited from encumbering the
project without HUD’s written approval, if the owner is in violation of this provision, the violation
should be brought to the attention of the Director of Asset Management in the HUD Regional or
Satellite Office with jurisdiction.
3. If the borrower has made a loan to fund repairs or betterments (whether or not evidenced on a
HUD-approved promissory note), a determination must be made as to whether the debt is
acceptable to HUD. If the debt is to be repaid as part of the 223(a)(7), it is not necessary for the
debt to be on a HUD-approved form prior to closing. If the debt is to remain in place after closing
to reduce cash requirements, the owner must evidence the debt on HUD-approved forms.
4. When additional indebtedness is associated with betterments made to the project and previously
financed, the borrower must provide a list of betterments financed by that indebtedness.
D. CNA requirement. A Capital Needs Assessment (CNA) is required for all Section 223(a)(7)
applications. See Chapter 5.10.D. For purposes of Section 223(a)(7) refinancings, an existing CNA
may be accepted if it conforms with current guidance for acceptability per Chapter 5.10.D.1.-3., under
Processing for Refinance or Acquisition, Section 223(f) and 223(a)(7) and 241(a) for Repairs and
Alterations.
E. Site visits. Site visits (by either the lender or HUD) may not be required, although in case of large or
distressed loans regardless of size, a site visit by the lender (and/or HUD staff) may be appropriate and
necessary.
F. Section 202 mortgage refinancings. Section 202 projects which are refinanced with an FHA-insured
loan are exempt from Section 514(g) of MAHRA under Section 514(h)(2) of that act, for as long as
the first FHA refinance loan is outstanding. If that FHA loan is subsequently again refinanced, (using
Section 223(a)(7) for example), that Section 514(g) exemption is no longer applicable. Thus, if the
Section 8 rents were above market, a reduction of rents to market at the expiration of the contract term
is required, and the underwriting of the new loan must reflect rent levels which change from current to
market rate in accordance with the expiration of the contract. Such projects must be sent to the Office
of Recapitalization for processing the rent reduction under the Mark to Market program.
MAP Guide, January 2016
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Chapter Title:
Subsection Designation:
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18.5
Chapter 18
Section 223(a)(7)
Application Requirements Checklist
Document page 534
Chapter Index / Section Index
Example of underwriting a Section 202 project exempt under MAHRA’s mark-to-market
provisions
Assumptions:
Original loan program
Section 202
Examples of rent-setting requirements for loans with different refinancing histories
Refinanced
into an insured
FHA loan in
accordance
with MAHRA
Loan 1
Yes
Exempt from
Section 514(g) rent
adjustment?
Subsequently
refinanced
Yes - Under
Section 514(h)(2)
Yes
Exempt from Section
514(g) rent adjustment for
underwriting/loan sizing
under MAP?
No - Section 514(h)(2) no
longer applies; adjustments
would apply at the HAP
contract’s expiration
G. Ownership/Property Management Changes. The lender must verify that any changes in ownership
since the endorsement of the existing loan have been properly documented and approved through
Previous Participation Review (e.g., submission of Form 2530). Section 223(a)(7) applications should
not be submitted until any required Previous Participation Reviews have been processed.
H. Changes of ownership. Any changes of ownership are subject to Transfer of Physical Assets (“TPA”)
procedures and must be executed separately from 223(a)(7) transactions. The borrower for the loan
being refinanced must be the same borrower for the proposed 223(a)(7) loan.
18.5
Application Requirements Checklist
Checklist and Exhibits.
See Appendix for the Section 223(a)(7) Application Requirements Checklist.
MAP Guide, January 2016
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Bookmarked version, r 1.1, page 534 of 534
| File Type | application/pdf |
| Author | HUD User |
| File Modified | 2016-02-12 |
| File Created | 2016-02-10 |